Powell's testimony will continue today as well

Forex Signals US Session Brief, July 11 – The USD Continues the Retreat That Powell’s Testimony Started Yesterday

Posted Thursday, July 11, 2019 by
Skerdian Meta • 5 min read

The US Dollar has been on a strong bullish trend since the end of Q1 last year as the global economy started to slow, while on the other hand, the US economy was expanding at a decent pace. As a result, the USD was the only major currency to invest in, with the Federal Reserve being on a fast tightening cycle during the last three years. The US economy started slowing down the pace of growth towards the end of last year, but the FED kept hiking rates, despite many calls from Donald Trump to stop the rate cuts.

Now it turns out that Donald Trump was right all along. The US economy slowed down considerably in Q2 of this year and the FED is now thinking of cutting interest rates instead, perhaps as soon as this month’s meeting. How bad do they look now? Couldn’t they foresee what was coming when the global economy has been weakening for about a year? I guess no one will hire Powell anymore now. The USD turned quite bearish in June after the last meeting of the FED, which sounded pretty dovish and the odds of a rate cut this month went up to nearly 100%.

Although the situation improved a bit after the G20 summit and the USD turned bullish this month, Powell repeated the dovish remarks yesterday in the testimony on the Semiannual Monetary Policy Report before the Senate Banking Committee, in Washington DC. So, the USD turned bearish again yesterday and it is continuing that sort of price action today as well, declining against all major currencies.

The European Session

  • China Making the Daily Round – China’s Commerce Ministry commented early this morning saying that they don’t have much more to say regarding the call with the US trade team. Both teams are working to implement the consensus reached by Trump and Xi. They refused to answer questions on a possible trade talk meeting. China has been consistent that its core concerns need to be met and they hope that the US will remove Huawei’s restrictions as soon as possible. China’s Defense Ministry also commented later that China firmly opposes US arms sales to Taiwan. The US’s move hurts its security interest, stability and this hurts military ties with China.
  • French and and German Inflation – Inflation weakened considerably towards the end of last year across the globe as Oil prices tumbled around $30 lower. But, they started increasing this year after OPEC+ cut the production quotas and they are going to extend the production cuts further. As a result, inflation has improved somewhat, but it still remains weak in the Eurozone. Today we had the final reading for French and German Consumer Price index CPI inflation which remained unchanged from the initial reading. In Germany, inflation increased by 0.3% in June as expected, while in France it grew by 0.2%.
  • UK GDP – The UK economy has been contracting during March and April which sets the path for a contraction in the GDP during Q2. Today’s report was expected to show a 0.3% increase in May, but considering the previous misses, the odds for another negative number were high. Although, the British economy expanded by 0.3% in May, as expected. GDP 3m/3m came at +0.3% against +0.1% expected. The headline number came as expected and that’s largely attributed to a recovery in car production, which is up by a record 24% m/m following a substantial drop in the month of April. As estimated now after this report, it would take a +0.8% increase in the GDP for June to see UK Q2 GDP turn flat, so this just confirms that we’re almost certainly going to see the economy shrink for the first time in seven years in the second quarter.
  • BOE’s Carney Discusses the Financial Stability Report – BOE Governor Mark Carney was speaking earlier, saying that the UK financial system is ready for Brexit, whatever form it takes. Preparations for Brexit have improved but some risks still remain. If trade tensions rise it would hurt global economy further amid vulnerability seen.
  • The ECB Sounding Increasingly Worried About Inflation – The ECB governing council member, Benoit Coeure was speaking in Frankfurt earlier. He said that the ECB is taking market concerns about protracted low inflation seriously. Stable inflation expectations are important for the economy. Need to consider and analyse developments in a broad set of inflation expectations. Recent market developments suggest current weakness in the Euro area and global demand will persist
  • ECB June Meeting Minutes – The ECB released the minutes from their last meeting in June. Some ECB officials argued for more accommodative TLTRO terms. Noted a drop in market-based inflation expectations. There should be no room for complacency in the face of falling inflation expectations. There was a broad agreement on need to change stance which will also demonstrate determination to act. The central bank should put more emphasis on symmetry of inflation aim. Potential measures include extending/strengthening forward guidance, resuming QE and cutting interest rates.

The US Session

  • Jerome Powell Testifies, 2nd Day – The FED chairman Powell started testifying on the Semiannual Monetary Policy Report before the House Financial Services Committee, in Washington DC yesterday. He sounded increasingly worried, which brought back the rate cut scenario for this month. The USD has been bearish since then. He will continue to testify today for the second day. The market is expecting him to be as dovish as yesterday, which would send the Buck even lower.
  • US CPI Inflation – The CPI inflation report from the US was just released. CPI MoM came at 0.1% for June, the same as in May, beating expectations of 0.0%. Core CPI excluding food and energy MoM increased to 0.3% versus 0.2% estimated and up from 0.1% in May. US CPI YoY moved lower to 1.6% as estimated, from last month’s 1.8%. But the core CPI YoY, which excludes food and energy, ticked higher to 2.1% from 2.0% previously and versus 2.0% estimated. Real average hourly earnings YoY also moved higher to 1.5% versus 1.3% expected. Real average weekly earnings YoY also beat expectations of 1.0%, coming at 1.2%. Overall, the numbers lean on the positive side, especially earnings and core inflation.
  • Canadian NHPI – The new house price index has been really weak this year, falling flat in the last five months and declining once by 0.1%. Today’s report was expected to show a 0.2% increase in may, but it missed expectations and instead declined by 0.1%. NHPI YoY fell flat to 0.0% versus 0.1% last month.

Trades in Sight

Bullish GBP/USD

  • The main trend is bearish
  • The pullback higher is complete
  • Fundamentals are bearish
  • The price is not moving away from the 50 SMA

The buyers look scared to push to far above the 50 SMA

A while ago we went short on GBP/USD. This pair has turned really bearish in the last few weeks and yesterday it broken the big support level at 1.25 which opened the door to further losses. Although, the USD has turned bearish in the last few session, after Powell’s testimony yesterday which sounded pretty dovish. But, the fundamentals surrounding the GBP are much more dovish and the buyers look exhausted now, since they haven’t been able to push too far above the 50 SMA in the last couple of hours. So, we are hoping for a bearish reversal soon, although there’s still Powell in the agenda, who will continue the testimony soon.

In Conclusion

The USD has turned bearish after Powell’s dovish remarks yesterday. The inflation report release a while ago today was positive but the USD is not doing much, as it waits for the second day of testimony from Powell. The risk now for the USD is on the upside. The market is expecting Powell to sound as dovish as yesterday, so if he falls short of it or if he lets out a few positive remarks,then the market will take that as a turnaround, which would send the USD higher, but let’s wait and hear what he has to say first.

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