The United States Dollar traded with a slight positive tinge during yesterday’s session but without the fireworks that some expected after Fed Chair Jerome Powell’s first day of congressional testimony failed to excite traders.
Overview
The dollar was largely flat this morning as well. Powell stuck to a very similar message as markets heard in Sintra last week, albeit with a few new statements focused more on the domestic picture, but largely kept markets quite calm.
Powell did not give markets any further clues as to when the Fed might begin to ease interest rates – traders still see September as more likely than not – but did mention multiple times that high inflation is now not the only risk the Fed must be balancing. He highlighted that the Fed, even though it seeks further evidence of slowing inflation, is ‘wary’ of potential labor market risks. Of note: Powell stated that labor is ‘not a source of inflationary pressures’ at this point, showing the Fed is, in fact, taking note of Friday’s softer jobs report out of the US. Equity markets, in response, responded positively, and the S&P 500 once again closed at a record high. Overnight interest rate swaps have returned to pricing in 50 basis points of easing from the central bank this year, even though the Fed’s dot plot only indicates one. This relatively new emphasis on not weakening the labor market too much is giving traders reason to cheer, but FX markets as a result did remain relatively flat through the overnight session.
Though Powell’s testimony does continue today in front of Congress, market attention is now shifting to the hard economic data due out tomorrow – US CPI. May’s release of this data point showed continually cooling inflation, but markets do expect a slight creep upward once again and no further easing in core inflation on an annualized basis.
What to Watch Today…
- UK GDP, Thursday
- US CPI, Thursday 8:30AM
- US PPI, Friday 8:30AM
- Monex USA Online is always open.
NZD ⇓
The New Zealand Dollar, currently the second-worst-performing currency in the G10, is trading three-quarters of a percent weaker against the Dollar overnight after Reserve Bank of New Zealand officials struck a surprisingly dovish tone. RBNZ kept its interest rate steady, marking eight straight meetings of holds, but suggested that the central bank could ease monetary policy sooner than it previously signaled. Citing a larger-than-expected impact of restrictive rates on domestic demand, this shift is decidedly dovish and a marked departure from previous statements.
MXN ⇑
The Mexican Peso, along with many other emerging market currencies and risk assets, is extending its gains against USD this morning, strengthening 0.7%. MXN and many other risk-forward assets have taken some solace from recent storms from Jay Powell’s congressional testimony in Congress yesterday that supports the market case for more than one interest rate cut from the Federal Reserve this year. Mexico’s key interest rate remains almost double that of the US, and any further differential or easier financial conditions from the world’s largest economy give support to MXN.
