What to expect from Powell's testimony?

Federal Reserve Chairman Jerome Powell will appear in US Congress this week to deliver his semiannual testimony. As usual, there will be two hearings - the first before the US House Financial Services Committee on Wednesday and the second before the US Senate Committee on Banking, Housing and Urban Affairs. Hearings will start at 3:00 pm BST on both days and Powell will begin with a prepared statement. Text of the speech is often released around 1:30 pm BST on the first day of testimonies but it is not always the case and it can be released as late as when the hearings begin.

What to expect from Powell's testimony this week?

Fed Chair Powell will attempt to explain the latest economic and monetary policy developments to US lawmakers. Importantly, this will be his first semiannual testimony after US banking sector turmoil of late-March 2023. Having said that, investors should expect Powell to touch on the topic in his prepared remarks as well as face questions from lawmakers on the matter, like for example how much tight credit conditions will weigh on the economy and how it impacts Fed's plans.

Also, Powell will likely have to explain while FOMC decided to keep rates unchanged at the latest meeting while at the same time stressing that inflation remains elevated, risks to inflation outlook remain on the upside and that rate hikes later this year are still median expectation among FOMC members (dot-plot suggested two more 25 basis point rate hikes). General feeling of the press conference was that Powell attempted to suggest that the pace of rate hikes may now slow to one on every other meeting. However, market does not seem to believe the dot-plot and continues to price in only one more 25 basis point rate hike this year.

Can markets get volatile?

This question is always tricky. Given that Powell's appearances and speeches are always top-tier, high-profile events with potential implications for markets, there is always a scope for a spike in volatility. However, a lot will depend on whether Powell says something we do not know already. As the latest FOMC meeting was held as recently as last week, it looks highly likely that Powell will not make any surprising statements. However, a number of market participants was puzzled by the message Powell sent at the post-meeting press conference creating confusion as to what Fed's next step will be. Some lawmakers have already said that they will attempt to pressure Powell into explaining his view for the coming months more plainly.

Having said that, a lot will depend on how Powell handles those pressures. Given that he has a rather good track record of keeping markets guessing and not slipping his tongue on what Fed will do next, it appears that Powell may stick to narrative from post-meeting press conference and continue to stress meeting-by-meeting, data-dependent approach to future rate decisions. This, in turn, means that markets may not have too many reasons to get volatile during Powell's appearance in Congress.

US dollar index (USDIDX) has been pulling back in June after a failed attempt at breaking above the resistance zone ranging above 23.6% retracement at the end of May. However, bulls managed to halt declines before the index reached a 101.40 support area. Powell's testimonies are key event for USD this week but given that Fed Chair has spoken on the economy at a post-meeting press conference as recently as last week, his remarks may fail to contain any surprising, market-moving news. Source: xStation5