Title: Dollar Slips as Powell’s Comments Point to Potential September Rate Cut
By Gertrude Chavez-Dreyfuss, original reporting via Reuters on TradingView
The US dollar declined on Tuesday following comments from Federal Reserve Chair Jerome Powell that suggested the central bank could consider an interest rate cut as early as September. Powell acknowledged that recent labor market data indicates a moderation in economic conditions, which could give the Fed the confidence it needs to begin reducing interest rates.
Key Highlights:
– Federal Reserve Chair Jerome Powell testified before Congress, expressing caution regarding the US economy.
– Traders interpreted his remarks as dovish, increasing the probability of a rate cut in September.
– The dollar weakened against a broad basket of currencies, particularly the euro and Japanese yen.
– US Treasury yields declined, supporting risk-sensitive currencies.
Powell Acknowledges a Cooling Economy
Federal Reserve Chair Jerome Powell stated that “more good data would strengthen” the case for beginning to lower interest rates. He highlighted that the economic outlook shows signs of slowing, especially within the labor market. Although Powell maintained that the Fed remains committed to its 2 percent inflation goal, he signaled a readiness to adjust monetary policy if data continues to support a more benign inflation trajectory.
Powell’s key testimony points:
– The US labor market is no longer “overheated.”
– Inflation is gradually easing but remains above the 2 percent target.
– More positive data is needed to affirm a downward trend in inflation.
– The Fed will make decisions “meeting by meeting,” depending on data.
Market Reaction to Powell’s Testimony
Following Powell’s statements, financial markets increased their bets on a rate cut in September. The probability of a rate reduction, based on Fed funds futures, jumped to nearly 80 percent, up from about 70 percent the previous day, according to CME’s FedWatch Tool.
Key market movements:
– The dollar index =USD dropped 0.12 percent to 105.01 late Tuesday.
– Euro rose 0.14 percent to $1.0827.
– Japanese yen gained 0.09 percent to 160.74 yen per dollar.
– The benchmark 10-year US Treasury yield fell to 4.28 percent.
– Equity markets showed modest gains as easing rate expectations boosted sentiment.
Investors broadly interpreted Powell’s cautious tone as a signal that rate cuts might not be far off if economic indicators continue to decelerate.
ADP Data Provides Mixed Signals Ahead of CPI
Attention now turns toward major economic indicators scheduled for release this week, including the Consumer Price Index (CPI) and the Producer Price Index (PPI), which are expected to influence upcoming policy decisions.
This week’s market moving events:
– Wednesday: Publication of the US CPI (Consumer Price Index)
– Thursday: Release of the US PPI (Producer Price Index)
– Thursday-Friday: Powell’s second appearance before the Senate Banking Committee
In contrast to Powell’s remarks, the ADP employment report released earlier on Wednesday showed that private payrolls grew more than anticipated in June. This somewhat clouded expectations for a quick Fed pivot.
ADP data highlights:
– US private sector jobs increased by 150,000 in June.
– Economists expected 160,000 additions for June.
– May’s figure was revised down to 157,000 from the initial 152,000.
– Wage growth for job-stayers rose 4.9 percent year-over-year.
– Wage growth for job-changers fell to 7.7 percent.
Despite the stronger-than-expected jobs increase, the overall data supports the idea that the labor market is cooling, further fueling speculation of a policy shift from the Federal Reserve later this year.
Dollar Weakness Extends Across Major Currencies
The greenback lost ground against several global currencies, as markets interpreted Powell’s comments as an indication that tightening cycles have likely ended.
Currency performance overview:
1. Euro (EUR/USD)
– The euro gained 0.14 percent
Explore this further here: USD/JPY trading.