Above: Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.
The Dollar was dumped but soon reversed its losses to go higher after markets struggled to make sense of an address by Chair of the Federal Reserve.
Pound Sterling and the Euro both jumped against the U.S. Dollar after Fed Chair Jerome Powell said in a speech that U.S. financial conditions had tightened considerably of late and that this might have a bearing on future decisions regarding interest rates.
"Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor" which "can have implications for monetary policy," said Powell in a speech in New York.
The comments acknowledge the recent role of surging U.S. bond yields in making borrowing more costly, which represents a tightening of financial conditions.
Heading into Powell's speech, markets were uncertain whether the Fed would tighten financial conditions itself in November or December with another interest rate rise.
Heightened expectations of a further hike, and the belief the Fed would keep interest rates high for an extended period, have proven a vital support of the Dollar's August-October rally.
The selloff in the Dollar and falling bond yields suggest the market's takeaway from Powell's comments is that there are now notably lower odds of further hikes.
The Pound to Dollar exchange rate was seen a third of a per cent higher at 1.2174 following Powell's comments, and the Euro to Dollar exchange rate was two-thirds of a per cent higher at 1.06.
In fact, the Dollar was lower against all its G10 peers, confirming this to be a high-impact speech.
But the price action soon flipped:
Above: GBPUSD at five-minute intervals.
Further aspects of the speech suggest the Fed is still intent on moving cautiously.
"We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy," said Powell.
Powell further addressed the issue of bond yields, saying they were a function of the resilient U.S. economy in comments that suggested he is somewhat at ease with recent developments than conveyed by his initial Dollar-moving observation.
Have we seen a game-changing intervention by the Fed Chair? That the Pound-Dollar rate is unchanged on the day at the time of writing would suggest not.