Powell sticks to the script in his text release

The greenback and US stocks are trading lower as softer housing data along with disappointing results from Home Depot and a key downgrade on industrial bellwether, Caterpillar, raised concerns economic cycle may have peaked.  The trade tariff delay rally appears to have run its course and it appears markets will wait to hear if Fed Chair Powell confirms his dovish pivot in his Semi-Annual Testimony.

USD – New Home Construction falls to a 2-year low

GBP – Rose to 5-month high as PM May considers delaying Brexit

Powell – Semi-Annual Testimony expected to confirm dovish pivot

GOLD – Remains stuck in key range

OIL – Vulnerable to further downside

USD

The US dollar softened slightly after new home construction in December dropped to the lowest level since September 2016.  The S&P CoreLogic Case-Shiller readings also all came lower than their prior readings and missed analysts’ consensus.  Continued weakening data will likely support the Fed’s dovish stance.

GBP

The British pound is trading closely to every Brexit headline.  Cable was higher and even broke above the 1.32 on optimism that the no-deal Brexit would be avoided.    PM May told the House of Commons that the UK will leave without a deal only if there is explicit consent for that outcome.  By mid-March, we will know if Parliament will vote for her deal, and if not if they will vote for a no-deal Brexit, which no one expects they would do.  The likely outcome would then be a vote on March14th to extend Article 50.  Sterling eventually gave up half of its gains after the Prime Minister noted she does not want extension.

Powell

Fed Chair Powell’s text noted that current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals.  Regarding QT, he reiterated they are prepared to adjust completing the balance sheet normalization.

When it comes to the testimony, he does not want to make another mistake like he did in the tail end of his rookie year. His first mistake was the comment that rates could go beyond neutral and the second one was that QT was autopilot.

Powell will try not to be too overly optimistic on the economy and will maintain the dovish pivot that Fed will be patient and flexible. His goal is to be consistent and not deviate from his recent communication, which would be supportive for financial markets.

Markets will eagerly await further clarification on when he will end QT. The Fed is showing diverging views on whether we could still see rate rises this year if growth remains robust. Powell needs to stick to the script of being data dependent and not show he is leaning towards being more optimistic.

GOLD

Gold remains in no man’s land.  The precious metal’s tight range over the past few days could finally see a substantial move if Fed Chair Powell does not deviate from the dovish pivot that was announced in January.

OIL

Crude prices are finding tentative support following yesterday’s plummet which stemmed from President Trump’s attack on OPEC driving oil prices higher.  Despite the bounce, oil prices could remain vulnerable as oversupply concerns are likely to return as we approach the warmer months.

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