Powell Gives Markets What They Want

The dollar declines as markets price in looser Fed policy after Powell’s dovish testimony firmly opens the door to a July rate cut.

Previous Day's Market Highlights

Fed Chair Jerome Powell gave markets, and President Trump, a clear indication on Wednesday that what they want is on the way - rate cuts. Powell used the first day of his semiannual Congressional testimony to state that 'crosscurrents' stemming from trade tensions and concerns about the strength of the global economy continue to dim the economic outlook. Powell went further, flagging concern that weak inflation could be more persistent than anticipated, while repeating the Fed's stance of 'acting as appropriate' to sustain economic expansion. The comments, namely concern over inflation returning symmetrically to the FOMC's 2% target as well as global economic concerns show that policy loosening is likely on the way - likely in the shape of a pre-emptive 'insurance' rate cut at the end of the month. In my view, a 25bps July cut seems largely a done deal, despite a relatively solid US economy. Minutes from the June FOMC meeting largely confirmed this, stating how many officials saw more accommodative policy being warranted in the near term. For markets, Powell's nod towards reducing rates saw bets on looser policy once again increase, with a 25bps rate cut in July, followed by another in September, now fully priced in. For the dollar, increased bets on looser policy exerted pressure, sending the greenback to the bottom of the FX leaderboard. The dollar slid around 0.45%, recording its first daily decline against a basket of peers in a week. 

Staying across the pond, monetary policy was also in focus from Canada, with the Bank of Canada (BoC) keeping interest rates unchanged, as expected. However, the BoC's statement struck a more cautious tone than seen previously, emphasising downside risks to the economic outlook despite the Canadian economy returning to growth around its potential. Despite the more cautious tone, policy loosening remains highly unlikely, with the BoC confirming that the current degree of accommodation remains appropriate. Such a stance should see the Canadian dollar well-supported in the months ahead as other central banks pivot to a more dovish policy stance. Over the course of the day, the loonie traded around 0.35% higher against the dollar, largely due to broad-based dollar weakness. 

Elsewhere, the dollar's advance resulted in every other G10 currency gaining ground. Sterling traded around 0.4% higher, breaking through the key $1.25 level, though ongoing political uncertainties should cap any rallies. Against the euro, sterling fell by around 0.1% amid quiet trading conditions, despite May's GDP figures showing 0.3% MoM growth, as expected. The common currency also gained against the dollar, adding around 0.45%. Wednesday's best performer was the kiwi dollar, which gained a shade under 0.7% as markets struck more of a risk-on tone. 

In other markets, European equities declined despite the prospects of looser monetary policy, with the Stoxx 600 losing 0.2%. Across the pond, the US benchmark S&P 500 added 0.45%, closing above the 3000 handle for the first time, as the prospects of looser monetary policy fuelled gains. Finally, oil prices surged after a sharper than expected inventory draw and a storm in the Gulf of Mexico supported prices. Both global benchmark Brent and US WTI crude closed with gains of around 4.5%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1110 1.1270 1.1092 1.58%
GBP/USD 1.2525 1.2784 1.2439 2.70%
EUR/USD 1.1270 1.1412 1.1181 2.02%
GBP/AUD 1.7955 1.8422 1.7852 3.09%
GBP/NZD 1.8790 1.9414 1.8674 3.81%
GBP/CAD 1.6345 1.6904 1.6326 3.42%

Today's Market Highlights

US monetary policy will be in focus once again today, with Fed Chair Powell's Congressional testimony continuing, along with a host of other Fed speakers and the release of June's CPI figures. While day two of the testimony is likely to be largely a reiteration of yesterday's comments, any fresh remarks on monetary policy may result in some volatility. Of more interest will be comments from a number of other FOMC members, as markets attempt to gauge the views of the committee as a whole and begin to focus on the extent of policy loosening that is likely to take place. Voting FOMC member Williams, along with non-voters Bostic, Barkin and Kashkari are due to comment throughout the day. 

Meanwhile, on the data front, CPI inflation figures for June are scheduled, and expected to show a relatively benign pace of prices increases in the US. Headline CPI is expected to dip to 1.6% YoY, representing a 5-month low and 0.2% lower than the previous reading. However, core CPI, which removes the effects of volatile food and energy prices, is expected to hold steady at 2.0% YoY for a second consecutive month. Despite resilient core CPI, markets would likely latch on to a soft headline figure as further cause for Fed policy easing, possibly weakening the dollar. On the other hand, even an above-forecast release seems unlikely to significantly dent the chances of a July rate cut after the move was clearly communicated by Powell yesterday.  

Back in Europe, monetary policy will also be in focus, with the European Central Bank (ECB) set to release minutes from their June policy meeting. Market participants will closely examine the minutes for signs of additional stimulus on the horizon, with Draghi & Co's forward guidance likely to be altered at the end of the month. Other focuses include the eurozone economic outlook as well as the impact of ongoing US-China trade tensions. Before the minutes, ECB Executive Board Member Coeuré is scheduled to speak, and is likely to reiterate his recent comments that quantitative easing could be restarted if required. 

Elsewhere, data is relatively limited. No major data points are due from the UK, where focus will remain on the ever-shifting political landscape. Overnight, markets will chew over trade data from China, looking closely for any impact of the ongoing trade war on the Chinese economy. 

Today's Economic Calendar

Time Currency Release Consensus Previous
12:30pm EUR ECB Monetary Policy Meeting Accounts
1:30pm USD CPI (YoY - Jun) 1.6% 1.8%
1:30pm USD Core CPI (YoY - Jun) 2.0% 2.0%
1:30pm USD Weekly Jobless Claims (Jul 5) 223k 221k
3:00pm USD Fed Chair Powell Congressional Testimony (Day 2)