By Peter Nurse
Investing.com - The dollar stabilized in early European trade Tuesday, after handing back some of the previous week’s gains during the previous session, with traders awaiting testimony from Federal Reserve Chair Jerome Powell in the wake of the central bank’s hawkish turn.
At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 92.002, bouncing after dropping 0.5% on Monday.
USD/JPY was up 0.1% at 110.44, EUR/USD dropped 0.1% to 1.1904, after gaining 0.4% overnight, GBP/USD fell 0.2% to 1.3906, trying to hold on to its overnight bounce, while the risk-sensitive AUD/USD was down 0.3% at 0.7514.
The dollar had gained sharply since Wednesday’s move by the U.S. Federal Reserve, the country’s central bank, to bring forward the median expected starting point for interest rate rises to 2023, a year earlier than previously guided, while also starting to discuss the timetable for reducing the Fed’s massive bond-buying program.
The dollar index gained 1.9% last week, its biggest weekly rise since March 2000, and it was perhaps understandable that traders cashed in some of those gains during Monday's session.
Fed officials have already started the process of explaining their thinking, with New York Fed president John Williams (NYSE: WMB ) taking a dovish tone Monday, saying more economic progress is needed before the central bank should begin to scale back some of its support.
However, others, including Dallas Fed President Robert Kaplan and his colleague in St. Louis, James Bullard, expressed views more in line with the change of overall tone at the central bank, calling for an early discussion over tapering the central bank’s ongoing bond purchases.
Now Fed Chair Jerome Powell heads to Capitol Hill to provide U.S. lawmakers in Congress with an update of the central bank’s support for the country’s economy during the pandemic. He is sure to be asked about the Fed’s new inflation concerns given his repeated insistence that the recent surge in prices would prove transitory in nature. Powell is due to start his testimony at 2 PM ET. His prepared remarks, already released late on Monday by the Fed, broadly echo what Powell said at his press conference last week.
“The hawkish turn from the Fed has many wondering whether its new strategy of 'Average Inflation Targeting' adopted last September was really just some elaborate form of forward guidance that would be dropped at the first sign of genuine concern over inflation,” said analysts at ING, in a note.
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