The Dollar is Falling Ahead of Powell's Appearance
The US dollar remained cautious on Tuesday ahead of testimony by Federal Reserve Chair Jerome Powell, while the Australian currency fell after the Reserve Bank of Australia lifted its cash rate by 25 basis points but muted its hawkishness in its statement.
The Australian dollar fell to a more than the two-month low of $0.6690 and was last down 0.33% at $0.6712 after the central bank lifted its cash rate to 3.60%, as predicted. The RBA modified a reference to more rate "increases" to "further tightening," implying that the central bank may be reaching the end of its rate-increase cycle.
"A first reading of the RBA's announcement implies they are reaching the end of the tightening cycle, and potentially one step closer to openly considering a pause," said Matt Simpson, senior market analyst at City Index.
Meanwhile, the US dollar index, which compares the greenback to six main competitors, declined 0.077% to 104.170 after falling 0.26% overnight. The index is down 0.6% for the month after rising 2.6% in February.
The euro was up 0.11% to $1.069, extending its overnight gain of over 0.5%. The pound was last trading at $1.2044, up 0.19% on the day, while the New Zealand dollar advanced 0.27% to $0.621. The Japanese yen was fairly unchanged at 135.94 per dollar ahead of Bank of Japan Governor Haruhiko Kuroda's last policy meeting on Thursday.
Investors will be focused on Powell's speech before Congress on Tuesday and Wednesday, as well as the February employment data, which is expected on Friday.
Powell, according to Kevin Cummins, chief economist at NatWest Markets, would likely indicate increased worry about inflation but will likely stop short of boosting expectations for a 50 basis point rate rise on March 22.
After hefty increases last year, the Fed lifted interest rates by 25 basis points at its most recent two sessions, but robust economic indicators throughout February fueled concerns that the central bank may return to larger moves.
"We anticipate he will seem noncommittal for the time being and take his cues from the impending incoming major data," said Cummins, who predicts the Fed will hike interest rates by 25 basis points.
Fed funds futures traders are putting in a 76% chance of a 25 basis point rate hike at the Fed's March meeting. They also predict that interest rates will peak at 5.48% in September and remain over 5% by the end of the year.
"What has become evident to financial markets is that inflation is proving considerably stickier than most had anticipated at the start of the year," according to ING analysts. "A return to the story of disinflation and a lower currency will have to wait."