Powell's 2-day testimony kicks-off, hawkish comments persist - more hikes. US equity markets dismiss Fed hawkishness, recover early session losses. US bond yields and the dollar fall although risk rally appears to be faltering

By Stuart Talman, XE currency strategist

Following strong gains through May and June, risk assets have hit the wall on the narrative that US equities, in particular tech stocks have overextended as the Fed has confirmed via last week's FOMC dot plots the tightening cycle will likely be extended over the next couple of meetings, projecting an additional two 25bps hikes.

Having logged 8 consecutive week-on-week gains, the Nasdaq is on track to end its bullish streak, whilst the broader S&P500's 5 week run is also in jeopardy. Less impacted by the AI induced tech rally, industrial stocks as represented by the Dow have not benefitted from the market's froth, but nonetheless, a three-week winning streak will end unless the equity market bulls find fresh legs late in the week.

The New Zealand dollar's 4%+ trough to peak run-up from the 31 May low below 60 US cents to last Friday's high a couple of pips shy of 0.6250 has lost momentum following three days of selling, although the Kiwi has recovered some ground over the past 24 hours.

On multiple occasions through Wednesday's sessions, NZDUSD has found support in the 0.6150's, bouncing from here as Fed Chair Powell has completed the first of his two-day semi-annual congressional testimony.

Powell's message did not deviate from last week's FOMC presser, commenting in prepared remarks: "Nearly all FOMC participants expect that it will be appropriate to raise interest rates by the end of the year."

However, Powell refrained from committing to any timing guidance adding, “We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks,".

Gapping lower at the open, US equities have been able to shake off Powell's hawkish tone, improving into the New York afternoon, but remaining in negative territory.

The New Zealand dollar was bid throughout Powell’s testimony, climbing from below 0.6160 to improve back up through 62 US cents. Overnight highs have been marked a couple of pips shy of 0.6220.

Powell was not the only Fed official speaking, Chicago Fed President, Austen Goolsbee commenting that last week's decision was a close call. Leaning slightly to the dovish side, Goolsbee added that the Fed will have a clearer picture on inflation over the next couple of months.

Ultimately, it appears to be another public speaking engagement whereby the market has dismissed Powell's hawkish rhetoric, the net effect following the end of day 1 testimony - stocks have improved whilst bond yields and the dollar have fallen.

At some point, convergence between the Fed's view and the market's view will dictate the next medium-term trend. If the market's view is validated, risk assets continue to rally…..the Fed's view, expect a significant downside washout.

In other news from Wednesday, UK CPI data has delivered another upside shocker.

Exceeding consensus estimates for a fourth consecutive month, core CPI reached a new cycle high of 7.1% (vs 6.8% expected), its highest level since March 1992. The result not only locks in a 25bpos hike from the BoE at this evening’s monetary policy meeting, but also increases the probability of a 50bps hike……although market pricing is firmly in favour of a quarter-percent move.

The pound initially spiked higher following the CPI release, before tipping over on the narrative that a BoE terminal rate somewhere in the 5.50% - 6.00% region will deliver some harsh outcomes for UK businesses, households and the broader economy.

The Kiwi is around two-thirds-of-a-percent higher versus the pound, NZDGBP bouncing off major multi-year support near 0.4820.

The market is now pricing in an additional 150bps of BoE tightening, and therefore a maximum hawkishness. The BoE is unlikely to meet the market's expectations, analysts' consensus calls projecting an additional 3 or 4 quarter point hikes.

Expectations remain for NZDGBP to base around current prominent lows in the low 0.48's.

Looking to the day ahead, the headline event is the Bank of England's interest rate decision - a 25bps hike to 4.75% the likely outcome. Attention will be on the composition of the vote and any forward guidance given the recent ultra-hot CPI reads for April and May.

Weekly jobless claims and day 2 of Powell's congressional testimony are the key events for the North American session.

We expect NZD selling pressure to re-emerged, anchoring NZDUSD near 62 US cents.

Stuart Talman is Director of Sales at XE. You can contact him here.