Forex today: Powell rubber stamps 25bp cut for July


Forex today was seeing a retake of shorts in the Dollar following Federal Reserve Chairman Powell's first day of his two-day testimony to Congress. Powell was advocating for a rate cut which weighed on both the greenback and US yields. He argued that the jobs report has done little to change the Fed's outlook and that was essentially taken by the market as a rubber stamp for at least a 25pb cut this month as investors get set of r the U.S. Consumer Price Index due today in New York's session. The FOMC Minutes did not give anything new to trade from.

"First, he restated the FOMC’s view from the June meeting that the Fed would ‘act as appropriate to sustain the expansion’, and that ‘the case for a somewhat more accommodative monetary policy had strengthened’ for ‘many’ FOMC members. He added that ‘since then (…) it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook’.

As well as reiterating that ‘inflation pressures remain muted’, meanwhile, he gave this a further dovish twist by saying ‘there is a risk that weak inflation will be even more persistent than we currently anticipate’. "

Analysts at ABN Amro explained. 

FOMC Minutes and key points

Then came along the FOMC Minutes. Prior to the Minutes. The minutesessentially repeated what Powell already said in his testimony earlier today.

  • A rate is warranted in the near term.
  • Could be appropriate if incoming data showed continued deterioration.
  • Growth and inflation risks are now weighted to the downside. 
  • Many Fed officials saw stronger rate cut case of mid-rising risks.
  • Many Fed officials in June saw risks weighted to the downside.
  • No decision was taken at the June FOMC on standing repo facility.
  • Several officials didn't yet see a strong rate cut case.
  • Many officials sought more Fed accommodation warranted near-term.
  • A few Fed officials saw rate cut risking financial imbalances.
  • Several officials sought near term cut as a cushion for shocks.
  • Many saw inflation expectations inconsistent with 2% goal.
  • Only a couple of Fed policymakers favoured cutting interest rates at June meeting.
  • Many participants said growth and inflation risks had shifted notably in the weeks ahead of the meeting and were now weighted to the downside.
  • Officials focused on global risks and discussed at some length salt business investment data from the 2nd quarter.


In other news, the Bank of Canada, as widely as expected, the bank held steady at 1.75% as fully expected but sounded slightly less upbeat on growth where the bank focused on the impact of protectionist trade measures. 

Currency action

  • EUR/USD climbed from 1.1215 to 1.1260, ending the day at 1.1250. 
  • USD/CAD was subject to bears selling on the BoC decision and optimism, while offered by the Powell outcome, dropping half a Loonie to 1.3080.
  • USD/JPY dropped from 108.95 to 108.35 and was also weighed by ongoing uncertainties on the geopolitical front. 
  • AUD/USD rallied despite the dovish RBA sentiment, finding relief on the dovish Fed rhetoric. The pair travelled between 0.6920 to 0.6960.
  • NZD/USD similarly rallied and it dod so from 0.6595 to a high of 0.6657. 

As for the yields, the US 2-year treasury yields fell sharply in response to Powell, from 1.92% to 1.82%. The 10-year yields fell from 2.10% to 2.04% and markets are now pricing 32bp of easing at the July meeting which is up from 27bp yesterday.

Key notes from Wall Street 

Key events coming up

Analysts at Westpac noted forthcoming events for Asia:

  • Australia’s housing market remains a hot topic but there should be limited interest in May housing finance approvals (11:30am Syd/9:30am Sing/HK), given that the month includes a surprise federal election result where tax breaks on investment housing were proposed and of course pre-dates two RBA rate cuts. Given soft industry data, Westpac looks for -1.5%mth; the median forecast is -1%.

  • In the NY morning, RBA deputy governor Debelle speaks via video conference at the FX Week USA conference.

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