Will Powell Be Cautious?

Market Drivers July 17, 2018
Kiwi explodes after inflation at 7 year high
Market eyes Powell testimony
Nikkei 0.44% Dax 0.18%
Oil $68/bbl
Gold $1244/oz.
Bitcoin $6700

Europe and Asia:
GBO UK Labor Data

North America:
USD Fed Chair Powell 10:00

It’s been a very quiet night of trade in FX with majors essentially stuck in 20 pip ranges through Asian and early European dealing.

The one exception to the lackluster pace of trade was the kiwi which popped more than 50 pips from session start after New Zealand core CPI figures came in at 1.7% – their highest reading in 7 years.

In Australia, the RBA minutes suggested that the next move in rates may be up if the economy develops as expected, although the central bank cautioned that this was not forward guidance for the market.

Although both New Zealand and Australian economies continue to progress at a steady pace, any immediate change in monetary policy is unlikely, given the global tensions on trade which could weigh on growth later in the year. Both currencies, however, have been grossly oversold and today’s newsflow served as a good excuse to rebalance the positioning.

Meanwhile, in the UK the Labor data came in exactly as expected with average wages printing at 2.5%. The wage growth was slightly lower than the month prior but remains at a pace that would allow the BOE to begin the normalization process by raising rates. Post-release rate hike expectations increased slightly to 75%, but UK monetary authorities continue to be constrained by the risks of Brexit. Today, Governor Carney once again warned that a no Brexit deal would be very damaging for the UK economy.

Still, the market pushed cable to fresh highs for the day as the general assumption amongst traders is that PM May will negotiate for a soft Brexit which will allow BOE to proceed with normalizing rate policy. So far, GBPUSD has been unable to clear the 1.3300 barriers this week, but if North American corps join the buying fray the pair could challenge the barrier before the end of the day.

In North America, the focus will be on Jerome Powell’s testimony in front of Congress with Fed Chairman likely to reiterate the modestly hawkish Fed view. Still, with recent tensions on the trade front and the palpable slowdown in consumer spending, it will interesting to see if the Fed Chair moderates his upbeat view. Any suggestion of a pause in the rate hike cycle could quickly send 10-year rates lower and drag USDJPY below 112.00. Yesterday Minneapolis President Neel Kashkari noted that the Fed should pay attention to the flattening yield curve and pause in order not to trigger a policy mistake. It’s doubtful that Chairman Powell will be that cautious in his outlook, but if he does give it credence the dollar could sell off as the day proceeds.