• Fed Chair Powell has ruled out a 75 bps rate hike, cooling hawkish expectations. 
  • By saying neutral rates are between 2% to 3%, markets see light at the end of the tunnel.
  • A late focus on supply-related inflation puts additional limits to Fed action. 
  • The dollar remains the currency of choice as other central banks are not as aggressive.

The Federal Reserve has lifted its leg from the hawkishness pedal – but remains en route to "expeditious" tightening, which is set to keep the dollar bid.

After a series of hawkish comments on the impact of inflation – and kicking off the presser by talking directly to the American people – Fed Chair Jerome Powell sent the dollar higher. But, traders want to know what's next.

First, Powell then all but ruled out a highly aggressive 75 bps rate hike, providing clear guidance about 50 bps hikes in both June and July. That puts one limit on rates and on dollar strength.

Secondly, the Fed Chair said that a neutral rate would be somewhere between 2% to 3%. According to the plan for the next two months, interest rates will reach a range of 1.75% to 2% already in July, so the following moves are constrained as well. Talking heads on financial media discussed levels as high as 3.50%, so that comment is another dollar downer. 

Third, despite all the rhetoric about inflation as a big issue, Powell stressed that some factors are beyond the Fed's control. Central banks impact demand, not supply, he retorted and then went on to elaborate on external factors. China's covid-related lockdowns and Russia's war in Ukraine weigh on supply and push prices higher. That Fed cannot fight that.

These three limits explain the blow to the dollar, but what's next? I think the greenback remains king, as the Fed is tightening faster than other central banks. Moreover, those external issues boost the dollar as a safe haven. 

All in all, we had a dollar-negative "buy the rumor, sell the fact," then a dollar rise in response to a determined view against inflation, and finally a downfall when Powell set limits to the Fed's hawkishness. And now, I expect the broader dollar uptrend is set to resume.

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