The statement of Fed Chairman Jerome Powell carries two critical signals that have a bullish impact on the US dollar.

The US Dollar Index (DXY) recorded a daily gain of almost 1%, reaching a high of 105.35 during the mid-session in New York on Tuesday (March 7th). The Greenback rally was fueled by the hawkish tone of Federal Reserve Chairman Jerome Powell's testimony, which weakened other currencies.

AUD/USD plunged by almost 2% to around 0.6600. GBP/USD fell 1.3% to around 1.1865. EUR/USD and NZD/USD dropped by more than 1%. USD/JPY strengthened by 0.6%, while USD/CAD reached its highest since October 2022.

dxyDXY Daily chart via TradingView

Jerome Powell acknowledged that inflation has slowed in specific sectors, such as housing. However, the pace of inflation in other important sectors remains high, especially in the area of services. Therefore, he believes that monetary policy should remain tight.

"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell said in remarks prepared for two appearances this week on Capitol Hill. "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."

Powell's statement carries two signals. First, the terminal interest rate is likely to be higher than the previous estimates by Fed officials. Second, the Fed may raise interest rates by more than 25 basis points at the upcoming FOMC meeting if inflation remains high.

In the December 2022 FOMC meeting, Fed officials released a dot plot scheme projecting a terminal interest rate of 5.1%. However, recent news has led market participants to increase their estimates of the terminal interest rate to 5.25%-5.50%.

Powell's testimony did not reveal his projections for how far the Fed will raise interest rates in the future. However, the market is increasingly confident that the next FOMC meeting will release a dot plot scheme with higher "rate hike" projections.

Furthermore, Jerome Powell emphasized in his testimony that interest rate decisions will be based on considerations at each meeting. The Fed does not have a specific plan for interest rate hikes, but rather each decision will depend on data and its impact on inflation and economic activity.