Federal Reserve Chair Powell has signalled a decisive end to the cycle of interest rate hikes for the USD.

The US dollar’s prolonged weakness in the Asian trading session, stemming from the previous week’s sell-off, has persisted. Over the past three weeks, the dollar index consistently closed lower, reflecting an overall decline of approximately -4.0% since its peak in October.

The recent sell-off was primarily fuelled by Powell’s Friday speech, where he provided the strongest indication yet that the Fed was concluding its hiking cycle. Powell advocated for a cautious approach, acknowledging the risks associated with both under- and over-tightening. Describing the current policy rate as “well into restrictive territory,” he suggested that the full effects of tightening policies might not have fully materialized.

Expressing confidence in the economy, Powell highlighted an improving balance between demand and supply in the labour market. While welcoming recent inflation readings contributing to a slowing core inflation rate of 2.5% over the six months ending in October, he stressed the need for continued progress to achieve the Fed’s 2% inflation objective.

Although Powell’s comments align with market expectations of no further Fed hikes, he subtly pushed back against the prevailing anticipation of aggressive rate cuts in the upcoming year. Powell stated that it would be premature to confidently conclude a sufficiently restrictive stance or speculate on the timing of potential policy easing.

Despite this, Powell’s remarks did not prompt an immediate adjustment in market expectations. The US rate market continues to fully price in a 25bps Fed rate cut by the 1st of May FOMC meeting, anticipating a total of 125bps in rate cuts by the end of the next year. The implied yield on the December 2024 Fed fund futures contract adjusted sharply lower by approximately 44bps last week, reflecting the market’s anticipation of more aggressive rate cuts in the coming year.

The catalysts for this adjustment were comments from Fed Governor Waller, suggesting the possibility of rate cuts in the next three to five months, and a softer PCE deflator report for October. Looking ahead, the focus is on incoming US economic data, which must provide evidence supporting the expectation of slowing inflation and weakening demand to validate the dovish repricing.

Deviation from these expectations could trigger a relief rally for US yields and the dollar. The pivotal moment for the recent dovish repricing will be the release of the latest non-farm payrolls report on Friday/Saturday, expected to offer further evidence regarding the alignment of demand and supply in the labour market.

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