US Close: King Dollar returns, Hawkish Powell sinks risk appetite, Oil and gold punished, Bitcoin nears lower boundaries

Fed Chair Powell killed risk appetite with a hawkish first day on Capitol Hill. Powell said that the Fed will likely need to raise interest rates more than expected due to the recent strong data and is prepared to move in larger steps if the “totality” of incoming information suggests more needs to be done to bring down inflation. 

US stocks did not stand a chance after Fed Chair Powell convinced markets that policymakers are comfortable taking this rate hiking campaign much higher. Powell is not taking any chances and wants to send home a clear message that the Fed will do whatever it takes to bring down inflation. 

FX

King dollar has returned as Wall Street scrambles to price in more Fed rate hikes and possibly larger ones.  We saw major moves in fixed income as the 2-year finally broke above 5.0%, the highest level since 2007. Hedge funds were aggressively short Treasuries and rejoiced today.  The bond market also saw the 2-year/10-year curve inversion reach 1 percentage point (~103bps), the most inverted in over 40-years. 

Dollar dominance won’t likely remain the dominant theme throughout the rest of the year, but positioning suggests it could thrive in the short-term. 

Oil

Crude prices got hit with a one-two punch as a hawkish Powell raised concerns that the economy would see a harder recession and sent the dollar skyrocketing.  This short-term pain for oil however shouldn’t last a while longer given how tight supplies remain.  WTI crude wasn’t going to make a big move above this year’s high, so abandoning the breakout above the $80 a barrel level was easily faded. 

Gold

Gold is getting crushed as the soft landing trade blew up today and sent the dollar higher.  Gold is in the danger zone once again and could see major bearish momentum on the break of the $1800 level.  The Fed is locked into a much more aggressive tightening stance and that could keep the short-end of the curve heading higher.  Gold might struggle here as bond bears completely ride this move higher in yields.  Non-interest bearing gold should have some support at the $1800 level but that could be tested if the next jobs and inflation report support the case for more aggressive rate hikes. 

Bitcoin

Every major risky asset class was under pressure following Fed Chair Powell’s first day of testimony.  Bitcoin was down but able to hold onto the lower boundaries of its key trading range.  Risk appetite is very vulnerable here and if this wave of risk aversion does not pass, cryptos may struggle to make fresh 2023 lows. 

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