Published on 08.03.2023 14:40

The Euro has hit a 3-month low in today’s trading session, following on from yesterday’s steep losses after an unexpected bullish testimony for US Federal reserve president Jerome Powell who informed financial markets that the US Central Bank was not done with rate hikes.

Powell, who delivered a testimony before the Senate Banking Committee of the U.S. Congress said that the Fed may need to raise rates more than expected and will stand ready to move in larger steps if incoming data warrant tougher action to bring inflation to heel.

Other policymakers have already been vocal about the need for more aggressive action due to recent economic data being stronger than expected.

However, Powell’s change of heart from highlighting the disinflationary process to underscoring the chance for larger steps prompted investors to profoundly increase their Fed hike bets.

"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," the U.S. central bank chief said in his semi-annual testimony before the Senate Banking Committee.

"Nothing about the data suggests to me that we've tightened too much - indeed, it suggests that we still have work to do. It's hard to make a case that we've over-tightened. It means we need to continue to tighten." He added.

Powell’s speech completely caught market participants off guard who had been expecting a softer tone from the Fed chief with some possible clues as to when the rate hikes would end. When this did not eventuate, and he mentioned further rate hikes were coming the Euro immediately slumped by around 100 basis points against the greenback.

Just how high and how fast Powell and his colleagues are willing to go will hinge on a clutch of key reports between now and the rate-setting Federal Open Market Committee's March 21-22 meeting, starting with employment data due later this week when the non-farm payrolls figure hits the market on Friday.

The US Jobs market is one of the key indicators on whether the Fed will continue their aggressive rate hiking cycle so a strong round of figures will likely see the Euro suffer further losses.