Dollar firm ahead of Powell testimony, sterling up on hot inflation

The dollar was firmer on Wednesday leading into Federal Reserve Chair Jerome Powell’s appearance before Congress where he is expected to strike a hawkish tone, while sterling firmed slightly after hotter-than-expected British inflation data.

The annual pace of British consumer price gains was steady at 8.7% in May, against hopes it had cooled since April. Sterling briefly rose as far as 0.3% against the dollar to $1.2803 before settling back to $1.2765.

It also rose slightly on the euro and yen, as traders were betting the Bank of England would need to take rates higher. Markets now price another 150 basis points of hiking for a peak at 6% in a year’s time.

The euro held to $1.0914 in Asia trade, while the yen slipped slightly to 141.80 per dollar as Bank of Japan minutes and officials stuck to a dovish stance and as traders turned their focus to the Fed.

Powell is due to begin his testimony before Congress at 1400 GMT.

“Despite having paused last week, the Fed officials … still surprisingly aggressively forecasted another 50 basis points in hikes by end 2023,” said currency analysts at Maybank.

“It is crucial to see whether (Powell) would more strongly drive home the point that the Fed is serious about another 50 bps of hikes or give the impression that they are ‘data dependent’,” they said. “The former may do more to give additional support to send the dollar index and yields higher.”

Elsewhere there was little appetite for a bounce from either the yuan or the Australian dollar, which have been battered by China’s shaky economic recovery and lack of major stimulus.

China set its yuan midpoint weaker than expected on Wednesday and the currency slid to a new seven-month trough of 7.1987 in onshore trade, while the offshore yuan weakened past 7.2 to the dollar.

The Aussie had taken a further beating thanks to Tuesday’s less-hawkish-than-expected central bank minutes following this month’s rate hike. It fell 0.9% overnight and last bought $0.6786.

“The path of least resistance is further declines,” said Commonwealth Bank of Australia (OTC:CMWAY) strategist Joe Capurso.

“The Aussie could dip below 0.6700 this week, particularly if Powell is hawkish,” he said.

The New Zealand dollar was dragged lower in sympathy, breaking below its 50-day moving average before steadying just above its 200-day moving average at $0.6178.

The U.S. dollar index was marginally firmer at 102.60. Bitcoin extended overnight gains to breach$29,000 for the first time since late May, helped by the launch of a new crypto exchange backed by Fidelity, Citadel Securities and Charles Schwab (NYSE:SCHW).