Dollar Weakens as Powell Opens Door for Future Rate Cuts

USD

Fed Chair Jerome Powell testified in front of Congress on Wednesday, and his dovish comments saw the dollar slide. Powell opened the door to future interest rate cuts, which all but confirmed market expectations that the Fed will cut rates going forward.

He described how uncertainties since the last Federal Reserve decision have continued to dim the economic outlook. What was key was his description of his fellow fed members, stating that the number of members wanting a rate cut had shifted from “many” to “most”.

The evening saw the release of the minutes from the Federal Reserve’s June Meeting, and this added to the notion that the central bank is prepared to cut interest rates at their meeting at the end of this month. The minutes indicated that a June rate cut was to soon as the deterioration in the economic outlook was “quite recent”, but Powell now has the backing of most Fed officials for a move.

GBP

The pound was kept near two-year lows yesterday, despite the GDP figure meeting expectations. The UK GDP figures for May saw a rise of -0.4% to 0.3%. This moderate rise saw the economy return to growth in May, with most of the growth being attributed to the partial recovery in car production. IT, Communications and Retail have been resilient and have showed strength in the last three months. However, UK Manufacturing Production figures continued to lag and they fell below for forecast of a 2.1 % increase. Instead, it came in at a measly 1.4% rise.

Wednesday saw brief respite for the pound, as it is has recently been hit by a slew of poor data and has been weighed on heavily by the continual risk of crashing out of the European Union without a deal. Further to this, governor Mark Carney has recently suggested that the bank might join peers in cutting interest rates. The volatile state of the pound is reflected in six-month implied volatility, with a 3 vol premium being the highest since May 2016.

Key Announcements

07:00 – EUR: Harmonized Index of Consumer Prices (YoY) (June); expected to remain at 1.3%
13:30 – USD: Consumer Price Index ex Food & Energy (YoY) (Jun); expected to remain at 2%
13:30 – USD: Consumer Price Index ex Food & Energy (MoM) (Jun); expected to increase to 0.2% from 0.1%
15:00 – USD: Fed Chair Powell Testifies