Jerome Powell did not become an ally of the dollar. Following yesterday’s speech by the Fed chairman to the House of Representatives, the greenback declined across the market, including against the euro. The U.S. dollar index hit nearly a 6-week low, dropping to the base of the 101 figure. Although, today, the dollar bulls are attempting to regain some lost positions, the overall fundamental backdrop is working against the American currency.
A rough patch for the greenback
The main anchor for the dollar is a reduction in hawkish expectations regarding the Federal Reserve’s future actions. However, at the moment, the market is nearly certain about a rate hike in July, although this does not contribute to strengthening the greenback. Judging by Powell’s rhetoric, the Federal Reserve is currently constrained in its maneuvers after ten rounds of tightening monetary policy. The central bank has left the option of further rate hikes open, but when and if it will apply them this year remains an open question. That’s why the dollar came under pressure yesterday, while the EUR/USD pair, in turn, is attempting to stabilize around the 1.10 level.
According to the CME FedWatch Tool, the probability of a 25-point rate hike following the July meeting is 71%. Before Powell’s testimony in Congress, this probability stood at 75%. In other words, the head of the Federal Reserve has not changed the market sentiment regarding the July meeting. However, the dollar weakened across the market in response to the Fed chairman’s rhetoric. In my opinion, the market has already partially priced in the July rate hike immediately after the June meeting outcome release.
The accompanying statement had a hawkish tone, with the central bank explicitly stating that it was taking a pause rather than ending the monetary policy tightening cycle. Therefore, any signals confirming a potential rate hike in July have a relatively weak impact on the dynamics of the greenback, whereas any doubts significantly affect the positions of the dollar bulls.
Interestingly, according to the aforementioned CME FedWatch Tool, the market estimates the probability of a rate hike in July at 71% while simultaneously being almost certain that the central bank will maintain the status quo at the next (September) meeting (the probability of this scenario is 65%).
What Powell said
Speaking before Congress yesterday, Powell made an interesting statement while commenting on the June pause. He stated that the central bank did not raise rates in June to assess the current state of the economy and the consequences of the measures already taken, “given how far we have come in terms of tightening monetary policy and how quickly we have moved.”
It is important to note that the Federal Reserve does not use the epistolary genre in its texts: every word carries weight and meaning. Therefore, the phrase “how far we have come” has a conclusive character in the context of the prospects of tightening monetary policy.
Another phrase uttered by Powell is of interest. According to his words, “almost all” members of the Federal Open Market Committee expect that the regulator will need to raise rates a little further by the end of this year (“move the rate a bit further from its current level,” literally). This suggests that if the regulator decides on another rate hike (which is highly likely), this step will likely be the final chord of the current monetary policy tightening cycle.
According to economists at Rabobank, the Fed will raise rates at the July meeting and maintain the status quo at the September meeting. There are two more meetings scheduled for the rest of the year—in November and December. According to experts from the bank, in theory, the central bank could decide on another rate hike at one of these meetings (if inflation slows down too slowly), but there is one caveat: by that time, the U.S. economy is likely to be in a mild recession. Therefore, the option of “one last shot” remains a priority.
Conclusions
The “conclusive” tone of Powell’s speech before Congress did not sit well with the dollar bulls. The dollar came under pressure, even though the Fed chairman essentially confirmed another rate hike within the current cycle. However, this fact had already been priced into current prices. Additionally, Powell lowered the probability of two rate hikes by the end of the year, although such a scenario is implied by the updated dot plot released in June.
Buyers of EUR/USD took advantage of the weakening American currency and are currently testing the 1.10 level. The current fundamental backdrop supports the development of a bullish trend in the medium term, as the European Central Bank appears more hawkish compared to the Federal Reserve. ECB President Christine Lagarde explicitly announced a rate hike at the next meeting and hinted at further steps in that direction after the July meeting.
From a technical perspective, the EUR/USD pair on the H4, D1, and W1 timeframes is either between the middle and upper lines of the Bollinger Bands indicator or on the upper line. On all mentioned timeframes, the price is above the lines of the Ichimoku indicator (including the Kumo cloud). This configuration indicates a preference for long positions. Opening long positions is advisable once buyers of EUR/USD establish themselves above the upper line of the Bollinger Bands on the daily chart (1.1010). In that case, the next target for the bullish movement will be 1.1100, which is the upper line of the Bollinger Bands on the weekly chart.
The material has been provided by InstaForex Company – www.instaforex.com
Jerome Powell did not become an ally of the dollar. Following yesterday’s speech by the Fed chairman to the House of Representatives, the greenback declined across the market, including against the euro. The U.S. dollar index hit nearly a 6-week low, dropping to the base of the 101 figure. Although, today, the dollar bulls are attempting to regain some lost positions, the overall fundamental backdrop is working against the American currency.
A rough patch for the greenback
The main anchor for the dollar is a reduction in hawkish expectations regarding the Federal Reserve’s future actions. However, at the moment, the market is nearly certain about a rate hike in July, although this does not contribute to strengthening the greenback. Judging by Powell’s rhetoric, the Federal Reserve is currently constrained in its maneuvers after ten rounds of tightening monetary policy. The central bank has left the option of further rate hikes open, but when and if it will apply them this year remains an open question. That’s why the dollar came under pressure yesterday, while the EUR/USD pair, in turn, is attempting to stabilize around the 1.10 level.
According to the CME FedWatch Tool, the probability of a 25-point rate hike following the July meeting is 71%. Before Powell’s testimony in Congress, this probability stood at 75%. In other words, the head of the Federal Reserve has not changed the market sentiment regarding the July meeting. However, the dollar weakened across the market in response to the Fed chairman’s rhetoric. In my opinion, the market has already partially priced in the July rate hike immediately after the June meeting outcome release.
The accompanying statement had a hawkish tone, with the central bank explicitly stating that it was taking a pause rather than ending the monetary policy tightening cycle. Therefore, any signals confirming a potential rate hike in July have a relatively weak impact on the dynamics of the greenback, whereas any doubts significantly affect the positions of the dollar bulls.
Interestingly, according to the aforementioned CME FedWatch Tool, the market estimates the probability of a rate hike in July at 71% while simultaneously being almost certain that the central bank will maintain the status quo at the next (September) meeting (the probability of this scenario is 65%).
What Powell said
Speaking before Congress yesterday, Powell made an interesting statement while commenting on the June pause. He stated that the central bank did not raise rates in June to assess the current state of the economy and the consequences of the measures already taken, “given how far we have come in terms of tightening monetary policy and how quickly we have moved.”
It is important to note that the Federal Reserve does not use the epistolary genre in its texts: every word carries weight and meaning. Therefore, the phrase “how far we have come” has a conclusive character in the context of the prospects of tightening monetary policy.
Another phrase uttered by Powell is of interest. According to his words, “almost all” members of the Federal Open Market Committee expect that the regulator will need to raise rates a little further by the end of this year (“move the rate a bit further from its current level,” literally). This suggests that if the regulator decides on another rate hike (which is highly likely), this step will likely be the final chord of the current monetary policy tightening cycle.
According to economists at Rabobank, the Fed will raise rates at the July meeting and maintain the status quo at the September meeting. There are two more meetings scheduled for the rest of the year—in November and December. According to experts from the bank, in theory, the central bank could decide on another rate hike at one of these meetings (if inflation slows down too slowly), but there is one caveat: by that time, the U.S. economy is likely to be in a mild recession. Therefore, the option of “one last shot” remains a priority.
Conclusions
The “conclusive” tone of Powell’s speech before Congress did not sit well with the dollar bulls. The dollar came under pressure, even though the Fed chairman essentially confirmed another rate hike within the current cycle. However, this fact had already been priced into current prices. Additionally, Powell lowered the probability of two rate hikes by the end of the year, although such a scenario is implied by the updated dot plot released in June.
Buyers of EUR/USD took advantage of the weakening American currency and are currently testing the 1.10 level. The current fundamental backdrop supports the development of a bullish trend in the medium term, as the European Central Bank appears more hawkish compared to the Federal Reserve. ECB President Christine Lagarde explicitly announced a rate hike at the next meeting and hinted at further steps in that direction after the July meeting.
From a technical perspective, the EUR/USD pair on the H4, D1, and W1 timeframes is either between the middle and upper lines of the Bollinger Bands indicator or on the upper line. On all mentioned timeframes, the price is above the lines of the Ichimoku indicator (including the Kumo cloud). This configuration indicates a preference for long positions. Opening long positions is advisable once buyers of EUR/USD establish themselves above the upper line of the Bollinger Bands on the daily chart (1.1010). In that case, the next target for the bullish movement will be 1.1100, which is the upper line of the Bollinger Bands on the weekly chart.
The material has been provided by InstaForex Company – www.instaforex.com
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