Original article by Tim Cooper, via Mitrade.
Title: USD Dips After Powell Testimony, Traders Await Inflation Data for Rate Cues
On Tuesday, the U.S. dollar retreated slightly following Federal Reserve Chair Jerome Powell’s testimony before Congress. During his remarks, Powell maintained a cautious stance on monetary policy, emphasizing the central bank’s data-dependent approach to interest rate decisions. Investors now await fresh inflation data this week before adjusting their policy rate expectations.
Summary of Current FX Market Trends:
– The U.S. Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, edged down by 0.1% to 105.03 during early European trading hours Wednesday after Powell’s comments tempered expectations of swift rate cuts.
– Powell reiterated that while the labor market is no longer overheated, the Fed still requires more data to confidently determine that inflation is headed sustainably toward its 2% target.
– The release of the U.S. Consumer Price Index (CPI) for June, due Thursday, is expected to be a pivotal moment for financial markets.
Powell’s Testimony Highlights:
Jerome Powell’s semiannual monetary policy testimony to the Senate Banking Committee offered few surprises. Key takeaways included:
– The Fed is prepared to cut interest rates if inflation continues to decline and economic risks intensify.
– Powell acknowledged signs of a cooling job market, although wage gains and unemployment levels remain robust.
– A strong emphasis remains on the need for “greater confidence” that inflation is falling towards the Fed’s long-term target before initiating any rate reductions.
– “We’re well aware that we now face two-sided risks,” Powell said, referring to the balance between combatting inflation and avoiding a slowdown in economic growth. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
– Despite mounting political pressure to ease policy, Powell signaled that the timing of the first rate cut remains uncertain and tied to upcoming economic data.
Market Reactions:
– The market interpreted Powell’s comments as slightly dovish, reinforcing bets that the Fed could begin cutting rates later this year—provided that inflation data supports such a move.
– Fed funds futures, which indicate trader expectations for U.S. interest rates, now assign a nearly 77% chance of a 25 basis point cut in September, according to the CME FedWatch Tool.
– U.S. Treasury yields fell moderately following Powell’s remarks, with the 10-year yield dipping to around 4.27%.
– The U.S. dollar weakened against most peers, particularly the Japanese yen and the euro.
Key Upcoming Economic Data:
Traders are closely monitoring upcoming data releases that could influence the Fed’s rate trajectory. These include:
▪ U.S. Consumer Price Index (CPI) – Due Thursday:
– Headline CPI is expected to rise 0.1% month-on-month in June, while the core CPI (excluding food and energy) is forecast to increase
Read more on EUR/USD trading.