Markets Are Positioning Ahead of Powell Testimony

Right now, it's all about positioning in the financial markets before Jerome Powell faces the music on Capitol Hill. Investors are playing it safe just in case the Fed Chairman takes on a more hawkish stance when testifying before Congress. If Powell's remarks remind traders that the Fed is planning two more interest rate hikes, it could dampen the market's mood. We saw a similar reaction after the initial decision and press conference by the Fed Chairman last week. But whether Powell sounds hawkish or dovish this week, the Fed's mantra of relying on data for policy decisions is likely to remain the same.

The USD got a boost thanks to stronger housing data. As a result, the DXY index went up, while the euro and sterling lost ground against the US dollar. However, the downward movements were limited before Powell's testimony. In other news, the AUD has been sliding after the RBA minutes revealed that the recent rate increase was a close call for the central bank board. But even though the decision to raise the benchmark rate above 4% was a tough one, there is currently no evidence to suggest that the RBA is close to reaching the highest possible rate, especially with the labor market continuing to improve.

Financial markets were anticipating stimulus measures from the PBOC, but the actions taken so far have been lackluster at best and unlikely to provide the necessary boost for the world's second-largest economy. Moves to loosen the MLF (Medium Lending Facility) and LPR (Loan Prime Rate) have fallen short of expectations, leaving financial markets wanting more from the PBOC. As a result, there has been a muted response from risk-assets.

Gold is once again losing ground due to the absence of new drivers of demand for the precious metal. Traders are seeking higher yields elsewhere in the current environment, and the lack of safe-haven demand is causing gold prices to decline. Spot gold is currently below the previous support level at around US$1942, which has now become a resistance area. The possibility of a short-term recovery in the gold price may depend on signs of a dovish stance in the upcoming testimony by the Fed Chairman.

Meanwhile, the oil price continues to be under pressure following the PBOC's recent actions, which failed to boost demand expectations. However, oil prices did manage to recover some ground during Asian trading hours, with the WTI spot price reaching US$71.40. Significant gains in the short term may be difficult to achieve unless there are improvements in the demand outlook for the latter part of 2023. That's why traders will eagerly wait to see if the PBOC has any additional measures to stimulate faster growth in China.