Fed caps dollar growth steering clear from a hawkish surprise

Jay Powell chose not to rock the markets yesterday, acknowledging that stronger economic data could lengthen the tightening cycle, while also saying that 2023 will be "a year of slowing inflation". The dollar still faces moderate upside risks this week, but stabilization looks more likely today.Fed Chairman Jerome Powell's speech yesterday did not contain the hawkish surprise that some feared. The NFP report was strong enough to expect hints of several rate hikes in 2023, but Powell appears to be reluctant to give up his relatively optimistic stance on the prospects for disinflation.Risk assets avoided the Fed's shock and the dollar's bullish momentum eased for the first time in three days. What are the future prospects for the US currency? Based on the reaction of risk assets, investors may feel relatively comfortable with the current estimate of the terminal rate of 5.15%, even though risks are skewed to the side of tightening by another 10 bp. This means that the upward correction of the dollar may continue for a little more, but the sustainable uptrend is a big question. If only because Powell and other Fed speakers have indicated that more data is needed to move to more hawkish forecasts.The US calendar is fairly quiet on this front today, but there will be a number of Fed speakers. We'll hear from John Williams, Lisa Cook, Raphael Bostic, Neil Kashkari and Christopher Waller. There is room for the Fed's general rhetoric to remain hawkish, and while the lack of key data could help the dollar stabilize somewhat today, risks are skewed towards a slight rally going into the week ahead.The European Central Bank's decision yesterday to cut government deposit rates to encourage withdrawals should not have major implications for the euro for now. The policy debate remains far more important: Isabelle Schnabel was hawkish yesterday and warned of the risk of inflation taking root in the medium term.The hawkish re-adjustment process by ECB officials following the market reaction to President Christine Lagarde's press conference last week looks set to continue, though markets have largely priced in. There is only one speaker scheduled for today, Klaas Knot (a hawk), and no interesting data releases on the euro area.EUR/USD broke through the 1.0700 mark yesterday, after which it recovered. In the coming days, retests of the level are possible, but further downward movement will probably not occur and the pair will be able to rebound from the level of 1.0670:EUR/GBP broke the 0.8900 support this morning, but this does not look like the start of a longer downtrend for the pair. The Bank of England's move away from dovish rate speculation is happening in tandem with the ECB, so there is no key catalyst for the sharp divergence in the values of the two currencies in the current environment.The UK data calendar is empty today and there are no scheduled speakers from the Bank of England. Governor Andrew Bailey will speak in Parliament tomorrow.