Powell’s Hawkish Remarks Spark Wall Street Sell-Off and Recession Concerns

March 8, 2023

Jerome Powell’s hawkish rhetoric triggered a surge in Federal Reserve rate expectations, sparking concerns of a potential recession and causing a sell-off in the riskier segments of the market, resulting in Wall Street experiencing a reality check. During a Senate hearing, Powell suggested that the Fed may accelerate the pace of tightening and raise interest rates if inflation continues to soar. According to the CME FedWatchTool, the market now predicts a potential half-point hike in March and estimates the peak rate to reach around 5.6%. Additionally, the US 2-year yield surpassed the 10-year yield by one percentage point, indicating a curve inversion, which can be a sign of a looming recession.

As a result, the S&P 500 tumbled below 4,000, and all eleven sectors of the S&P500 remained bearish. The Financial and Real Estate sectors were hit the hardest, declining by more than 2% each, while the Nasdaq 100, Dow Jones Industrial Average, and MSCI world index fell by 1.2%, 1.7%, and 1.5%, respectively. The sudden sell-off showed that the stock market was surrounded by bearish traction across the board, with no sector showing positive performance. The current situation in the market has raised concerns among investors, who fear that the economy may be heading toward a recession, especially since curve inversions are often seen as a potential harbinger of a recession.

Main Pairs Movement

The US dollar surged to a three-month high, marking its most significant gains since early October 2022. This unexpected rise was due to Fed Chair Powell’s surprising readiness for more rate hikes and bolstered bets of a 50 bps Fed rate hike in March. These remarks propelled “higher for longer” Fed rate expectations, bolstered US Treasury bond yields, and negatively impacted equities.

In particular, GBPUSD experienced a 1.62% drop as Powell’s hawkish testimony, Brexit concerns, and BoE rate hike worries weighed on Cable bears, causing the pair to fall sharply by almost 0.9% following Powell’s speech. Meanwhile, EURUSD also tumbled by 1.22% on Tuesday.

Additionally, XAUUSD witnessed a 1.82% drop on a daily basis, with gold prices being highly susceptible to the possibility of a firmer 50 bps rate hike from the Federal Reserve. As a result, the price of gold continued to decline throughout the trading session, experiencing almost 1% in losses within an hour.

Technical Analysis

EURUSD (4-Hour Chart)

On Tuesday, the EUR/USD pair plummeted below the 1.0580 level, recording a 0.92% loss for the day. The renewed strength of the US dollar, supported by the recovery of the US 10-year Treasury bond yield, pushed the pair into negative territory after Fed Chair Powell’s hawkish speech. Powell’s remarks about increasing the pace of rate hikes and a higher terminal rate than previously anticipated prompted the market to raise the odds of a 50 basis points rate hike at the March FOMC meeting to 50%. Meanwhile, investors in the Eurozone are anticipating more rate hikes from the ECB amid fears of higher inflation.

From a technical perspective, the RSI indicator and Bollinger Bands suggest a downside trend, with the pair testing the 1.0576 support line and the risk skewing to the downside if it falls below that level.

Resistance: 1.0686, 1.0790

Support: 1.0576, 1.0540, 1.0508

XAUUSD (4-Hour Chart)

Powell’s hawkish remarks have caused the gold price to drop below $1,820, reaching $1,815 at the moment. Market participants viewed Powell’s speech as hawkish, causing the chance of a 50 basis points rate hike to jump to nearly 50%. Gold prices continued to decline despite US yields moving off lows, as a stronger greenback and risk aversion influenced the market.

From a technical perspective, the gold price dropped by about 1.69% on the daily chart and is approaching the bottom of the range. The price is back below a bearish 20 SMA, which is currently converging with the 23.6% retracement of the latest decline at $1,841.05. On the four-hour chart, the gold price is developing below all its moving averages, with the 20 SMA gaining downtrend traction between the longer ones. Additionally, technical indicators are well below their midlines, indicating sustained selling interest.

Resistance: 1,829.90 1,841.05 1,858.30

Support: 1,804.70 1,789.60 1,774.20

Economic Data