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Increased Fed chatter keeps dollar well-supported

The US dollar continued to be well-supported and gold remained pressured on Thursday as confidence in a mid-March interest rate hike by the Federal Reserve intensified further. In a media interview on Thursday, Fed Governor Jerome Powell said that “the case for a rate increase for March has come together.” This sentiment echoes a series of recent hawkish remarks by other Fed officials in support of an impending rate hike. A day earlier, even the dovish-leaning Fed Governor Lael Brainard said that the case for a rate hike is strong.

From the financial markets’ perspective, speculation in Fed Fund futures currently point to around a 75% likelihood of a 25-basis-point rate hike in less than two weeks when the Fed has its next policy meeting. This represents a sharp increase that has more than doubled the 35% probability seen prior to President Trump’s address to Congress on Tuesday. Just last week, that figure was fluctuating in the high-teens and low-20’s.

What has changed so dramatically within just the past several days? Besides the recent hawkish pronouncements by Fed officials that have been supported in part by generally positive US economic data of late, Trump’s market-rousing address on Tuesday fueled further confidence that the administration is determined to work with Congress in furthering its pro-growth, pro-spending agenda. This, in turn, has once again helped renew expectations of inflationary pressures and likely monetary policy action by the Fed.

On Friday, several key Fed officials will be speaking separately, including Chicago Fed President Charles Evans, Fed Governors Jerome Powell and Stanley Fischer, and most notably, Fed Chair Janet Yellen. More hawkish comments from these officials could lead to even higher expectations for a mid-March rate hike, which is likely to give a further boost to the dollar and lead to more pressure on gold.

From a price perspective, the dollar has performed strongly against most of its major currency counterparts in the past few days. As of Thursday, dollar strength has helped push EUR/USD back down to the key 1.0500 support level. While this support has held steadily since early January, the currency pair is likely poised for a breakdown to extend the longer-term downtrend, given the Fed’s increasingly hawkish stance. In the event of a breakdown below 1.0500, the next major downside target is around the 1.0350 support area, which represents the December-January lows. Any further break below that level would confirm a continuation of the entrenched EUR/USD downtrend.

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