Federal Reserve Chair Jerome Powell's testimony not only shook the US dollar but also raised attention to the release of Nonfarm Payrolls data tomorrow.

The US dollar index (DXY) retreated from its record high of 105.88 during the New York session on Wednesday (March 8th). After the Fed Chair's hawkish statement yesterday, market participants are still actively discussing the prospects of future interest rate hikes.

dxyDXY Daily chart via TradingView

In his first testimony, Powell stated that The Fed might need to raise interest rates higher than expected in response to strong recent economic data. This statement prompted market participants to increase their projections of future Fed interest rates.

Fed Funds Futures now show a 66% chance of a 50 basis point rate hike at the March 21-22 FOMC meeting, up from just 22% before Powell's testimony. Market projections for the terminal interest rate have also risen to 5.6% as of September.

This increased projection sparked a rally in the US dollar on Tuesday's trading. However, some analysts believe that the market reaction was overdone and that today's Powell testimony will not provide any new catalysts.

"I don't think Powell told us anything we didn't already know. I think it just shows the market sensitivity and uncertainty about where the peak Fed funds rate's going to be," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

Tonight's release of the ADP Nonfarm Employment Change report for February 2023 again showed the United States's robust labor market situation. The data increased by 242k, surpassing the consensus estimate of only 200k. Data for January 2023 was also revised upward from 106k to 119k.

Market participants are monitoring Powell's continued testimony to the US Parliament tonight while awaiting the release of Nonfarm Payrolls data tomorrow. The consensus estimate predicts that payroll numbers will decrease from 517k to 205k in the report. If the numbers exceed expectations or are far below expectations, the market may become volatile again.

"Friday's U.S. employment data now take on particular significance" after Powell's comments, Credit Suisse analysts, including Shahab Jalinoos said in a report on Wednesday. "Data strong enough to show the rates market is not being hysterical in pricing higher Fed rates for longer would risk a test of 2023 EURUSD lows."