In his prepared testimony for Congress, Fed chair Jerome Powell seems to have laid the groundwork for looser monetary policy from the FOMC. The scene is set for a July rate cut, but what is still in question, is how many we will now see.
Powell painted a rather downbeat picture of the economy. Playing down the Q1 GDP print of +3.1% as being net exports and inventories driven (not sustainable), Powell pointed to the slowing business growth, which “slowed notably” and “moderated” in Q2. Furthermore, business fixed investment (citing the trade tensions) whilst housing and manufacturing output declineing over both Q1 and Q2.
On inflation, Powell looks to be crucially increasingly cautious. He talks about how the FOMC was leaning towards accommodative policy in the latest meeting, and it seems that these conditions driving this opinion have continued. A couple of meetings ago, the Fed talked about the drop in inflation being transitory, but inflation pressures now remain muted. We know that inflation is being viewed as crucial by the Fed and this is the main crux of the dovish steer. It also certainly puts heavy emphasis on tomorrow’s CPI.
All things considered, this is a testimony that suggests the FOMC will move to cut rates in July. This looks to be a cautious stance from Powell. A 25 basis point cut seems sufficient for now. An emergency cut that effectively unwinds the December cut (which seemed one too far). How the Fed guides for beyond that will be crucial as to whether it is seen as a “hawkish cut” (ie.e one and done).
The market has been building up for the testimony. Ever since the better than expected Non-farm Payrolls report last Friday, there has been a decisive shift in sentiment. Yields higher, dollar higher, gold lower. However, there has been another shift in sentiment now. This morning, the CME Group FedWatch futures were pricing in a 99% chance of a 25bps cut and a 1% chance of no change. This has swung back once more, with Fed Funds Futures to show an 80% chance of 25bps and a 20% chance of a 50bps cut. The 10 year yield is 6bps lower, whilst the 2 year yield is 7bps lower. A bearish key one day reversal on the 2 year reflects a changing outlook (although not yet on a closing basis).
How has this impacted on the major FX pairs?
EUR/USD has jumped 30 pips. The resistance at $1.1265 remains pivotal. A close above would be a strong signal for further gains.
GBP/USD has jumped 45 pips. A mini downtrend is breaking, with overhead supply around $1.2500 tested. A decisive breach would open $1.2600/$1.2650 but we would still be cautious of chasing sterling higher too strongly.
USD/JPY has dropped back under 108.80, with the support band 108.15/108.50 being key to maintaining the positive outlook for the recovery.
Gold has rallied around $12. The volatility continues. However, it is interesting that the near term resistance at $1410 has capped the gains. There is a pivot around $1400 which will now be watched.