Powell's speech disappointed proponents of the idea that the Fed is in a hurry to normalize policy with the pace priced in by market expectations, which were shaped after the release of the minutes of the December FOMC meeting. Despite assurances that the Fed will not allow high inflation to take root in consumers expectations, Powell discouraged markets by the baseline scenario that price pressures should top out in the middle of this year. Given this dovish stance, it is difficult to expect the Fed to raise rates four times this year. The overbought dollar came under pressure, risk assets were given reprieve, and the Treasuries rose, as the worst-case scenario for this market in the near future was avoided. Commodities and commodity-sensitive currencies such as the NZD and AUD also reacted positively. Bitcoin was also able to defend support at $ 40K.

However, the speed at which the Fed's stance towards inflation has changed throughout 2021 (from the first rate hike in 2024 to at least two rate hikes in 2022) serves as an important reminder that the central bank's inflation forecast will likely be revised more than once this year. Therefore, the markets will pay special attention to the US inflation report for December, which appears today. Inflation above the 7% forecast or core inflation above 5% could raise doubts as to whether the Fed will be able to stick to its baseline forecast (inflation peak in 2022). The dollar may have a chance of bouncing, especially if core inflation exceeds forecasts, as it excludes goods or services with volatile prices and allows to see the underlying trends in supply and demand.

From a technical point of view, the dollar index approached the lower border of the monthly range and a strong inflation report will allow counting on a false breakout and rebound from the 95.50 level or consolidation near the level. However, earlier, on January 3, the price had already tested and bounced off the support level, and the repeated downward movement signals intentions to try to break through the level and somewhat discourages buying the dip:

Another interesting information may be contained in the "Beige Book", the release of which is scheduled for today, as well as speech of traditional Fed dove, Neil Kashkari.

As for the ECB, there is a gradual consolidation of hawkish opinions. The new head of the Bundesbank, Nagel, said he doubted that inflation was caused solely by temporary factors. Too frequent attacks from hawks in the Governing Council could cast doubt on the ability of ECB head Lagarde to uphold the dove line and pose a risk to expectations that the ECB will lag behind the Fed on policy normalization. However, before the release of the ECB's official inflation forecasts in March, such comments are likely to be insufficient to support the European currency.

GBP posted tepid response to the political buzz surrounding Prime Minister Johnson's accusations that he attended a Downing Street party in May 2020 when social restrictions were in effect. GBPUSD has broken through the upper border of the descending channel, which may accelerate the upward movement if it succeeds in gaining a foothold above the line today:

The CAD broke yesterday the 1.26 level and is approaching an important psychological support level - the 1.25 level, where the 200-day MA resides as well. Relatively high oil prices and the prospect of a tightening in Bank of Canada policy thanks to recovery in the labor market were the main drivers of the recent decline. However, in my opinion, one should count on a rebound near 1.25, as a breakthrough below the support will likely require an even more positive trend in the oil market, which is difficult to expect in the near future, given that oil is also approaching a local high, where it will also meet serious resistance. The strengthening of the dollar on a strong inflation report will also lend more credence to such a scenario in CAD.