The U.S. Dollar Index edged up this morning, increasing by 0.12% to reach 105.13. Investors are preparing for Federal Reserve Chair Jerome Powell's semi-annual monetary policy speech.
Powell’s comments are highly anticipated, with market participants looking for clues about future monetary policy changes. This market movement followed the NFIB Small Business Index surpassing expectations, coming in at 91.5 compared to the forecasted 90.3.
In Europe, the Eurozone witnessed significant political activity with the far-right's defeat in French elections. Yet, the political scene remains divided, potentially presenting legislative challenges and impacting the euro. As a result, the EUR/USD pair dipped slightly to 1.08078.
Meanwhile, the British pound saw a slight dip against the USD, falling by 0.12% to 1.2788. Bank of England's Monetary Policy Committee member Jonathan Haskel showed a preference for keeping current interest rates, citing a tight UK labor market. However, there is still a 65% market expectation of a rate cut at the upcoming August 1st meeting.
Impact of Powell's testimony on the market
The U.S. dollar has rebounded from nearly a monthly low against key currencies, as traders await Powell's comments after a weaker-than-expected U.S. jobs report. The dollar index, which measures the currency against six major peers, rose to 105.06 from an overnight low of 104.80, which was a 3.5-week low. Last week's nearly 1% decline, driven by the soft payrolls data, increased expectations for upcoming Fed rate cuts.
Current market sentiment, as shown by the CME Group's FedWatch Tool, indicates a 76% likelihood of a rate cut in September, up from 66% the previous week. Another cut is anticipated by December. MUFG currency strategist, Derek Halpenny, pointed out the dollar's vulnerability to further declines due to the ongoing macroeconomic conditions.
Global currency movements
The euro stayed stable, trading at $1.0819, just below Monday's four-week high of $1.0845. Despite this stability, the currency has experienced fluctuations due to ongoing uncertainties in French politics. Talks about a potential left-wing government or a technocrat prime minister continue to influence market sentiment.
Sterling saw a slight decrease, trading at $1.2799 after peaking at $1.28455, its highest level since mid-June. The yen stabilized at 160.93 per dollar, recovering from a recent 38-year low of 161.96, amid speculation about possible rate hikes by the Bank of Japan at its upcoming meeting.
Powell's prepared remarks
In his prepared speech, Powell expressed concerns about keeping high interest rates for too long, as it could hurt economic growth. Despite some recent easing in inflation and slowing in the labor market, Powell emphasized the need to stay watchful to meet inflation targets. The Fed’s overnight borrowing rate is at its highest in 23 years after 11 consecutive hikes.
Powell's speech comes almost a year since the last increase in benchmark interest rates. While markets expect a rate cut in September, FOMC members have hinted at the possibility of only one cut by year-end. Powell stressed the need for stronger economic data to boost confidence in meeting the Fed's 2% inflation goal.
Market reactions and future outlook
As Powell prepares to speak to the Senate Banking Committee and the House Financial Services Committee, markets remain highly reactive to his remarks. Democratic committee members have urged for lower rates to support employment and economic progress. Nonetheless, Powell reiterated the Fed's focus on economic stability and its operational independence.
Recent economic data presents a mixed outlook, with rising unemployment and a slowdown in GDP growth. Both the manufacturing and services sectors reported contractions in June. Despite these challenges, Powell noted that the U.S. economy continues to grow at a strong pace, driven by robust private domestic demand and stable consumer spending.
The release of U.S. CPI data on Thursday will be a critical indicator for future monetary policy decisions. As market participants await this key data, Powell's testimony and subsequent economic indicators will significantly shape the near-term outlook for the U.S. dollar and global financial markets.