Where Did Powell’s Testimony Leave the USD and Financial Markets in General?

Posted Saturday, July 13, 2019 by
Skerdian Meta • 4 min read

The FED chairman Jerome Powell made his appearance in front of the US Congress on the Semiannual Monetary Policy Report before the House Financial Services Committee, in Washington DC for the 2-day testimony. The US economy has been holding up well in the past year, despite growing global economic weakness. But in the last few months, the economic reports from the US have shown that the US economy has slowed as well in Q2.

The FED sounded pretty dovish in the last meeting in June and the USD turned bearish after the odds of a rate cut in July surged to nearly 100%, with EUR/USD climbing nearly 100 pips. But the US economy is still way ahead of the rest of the major economies of the globe and in the last two weeks we have seen some promising figures, which put back into question the rate cut this month. So, traders were growing sort of uncertain, especially after the positive tones of the G20 Summit. Although Powell’s commentary at the testimony gave us come clarity in the near term, the picture still seems unclear for the longer period. Let’s list his comments below, as well as the FOMC minutes from the last FED meeting:

Powell’s testimony Day 1

  • Uncertainties since June FOMC continued to dim outlook, it appears reigning uncertainties and concerns about global economy continue to weigh on US economic outlook.
  • The FED will act as appropriate to sustain US economic growth.
  • Baseline outlook for US economic growth remained solid. Labor markets to stay strong and inflation to move back up to central bank’s 2% target.
  • There is a risk that weak inflation will be even more persistent than Fed currently anticipates.
  • US consumer spending growth was weak in first-quarter but data shows it has bounced back and is running at a solid pace.
  • US economy’s long-term challenges include high and rising federal debt and relative stagnation of middle and lower incomes.
  • Housing manufacturing look to have dipped again in Q2, the economy performed reasonably well over H1, jobs healthy.
  • Many of June FOMC is a soft case for somewhat easier policy. Investment seems to have slowed notably on trade fears and inflation pressures remain muted.
  • We don’t expect a severe downturn but, we would use all tools in toolkit, which we believe would be adequate

Powell’s Testimony Day 2

  • Businesses are starting to hold back on investment
  • It has really slowed down here
  • You see really weak economic performance in Asia and Europe
  • Many of my colleagues on the FOMC have come to the view that a somewhat more accomodative policy may be appropriate
  • Fed policy not influenced by political pressure
  • US economy in a very good place but uncertainties weigh
  • We’ve signaled that we are open to more accommodation
  • We will use our tools to keep expansion going
  • US consumer part of economy is intact
  • Worried by some weakness in business sector, tied to softness and global manufacturing
  • Lessons from Japan include, don’t get behind the curve and let inflation drop below 2%
  • Don’t want to let inflation drop well below 2% goal
  • Important to defend FETs 2% symmetric goal and we will
  • Legal and illegal immigrants add to the workforce, total immigration has accounted for 50% of workforce growth and added to GDP growth
  • Should not assume Fed can be relied upon to shield economy in the event of failure to lift Debt ceiling
  • Essential that Congress raise debt ceiling in timely way.
  • Uncertainty on the part of business is most concerning with regard to trade.
  • Uncertainty will weigh on the economic outlook, been hearing it all year long from business contacts.
  • Most cryptocurrencies used for store of value like gold, not transactions.
  • Not seeing widespread adoption of cryptocurrencies.

FOMC Meeting Minutes

  • “Many” FED members saw a stronger need for rate cuts due to growing risks
  • “Several” FED members weren’t convinced that rate cuts were yet necessary
  • “Many” FED members viewed inflation as lagging the 2% target considerably
  • “Many” FED members stated that uncertainty toward growth and risk had shifted significantly in late-May/early-June

The main takes from this testimony are that the US uncertainties have “dimmed the outlook” and that “muted price pressure may be more persistent”. These two comments alone show how the FED sees the current situation regarding the US economy. Most of the comments in the testimony are pretty dovish compared to the previous FED meetings and statements, apart from the last meeting.

So, while markets priced in a 100% chance of a rate cut in July after the last meeting, these comments confirm that bias. The FOMC minutes from the last meeting clearly point to a rate cut this month. Several FOMC members weren’t still convinced that a cut was necessary in the last meeting but most were. Besides that, they are growing concerned that inflation is lagging behind the 2% target, as FOMC minutes show. Powell did mention it in the comments with lessons from Japan.

This definitely points to a rate cut this month. That’s the reason the US Dollar turned bearish on Wednesday, while US stock markets rallied that day and in the following days this week. The dovish stance from the FED will likely keep stock markets on the run, at least until the next rate cut comes. This should also keep the USD bearish, but the situation complicates further for the USD because markets are uncertain whether the FED will just cut interest rates once this month or if they will enter a monetary easing cycle.

If the FED cuts rates just this month and closes the door for further cuts, then it might turn into a positive thing for the Buck. After all, all other major central banks have turned pretty dovish now. If they leave the door open to further cuts, then the situation for USD buyers will get more complicated.

The long term uptrend might not be over yet, because the rest of the globe is in a worse position economically, but we might see a meaningful pullback in he coming months. But, we have to see the economic data from the US leading to this month’s meeting and then hear what the FED has to say in that meeting after they decide to cut rates. Besides that, as the uncertainty regarding the future of the USD increases, the demand for safe havens will remain elevated since traders will have nowhere else to turn to, so watch for further upside pressure on the JPY, the CHF and Gold.

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