Thursday, July 11, 2019

Powell confirms that a rate cut in July is pretty much decided, the Dollar turns lower



The Dollar drops across the board on the back of Jerome Powell’s testimony to Congress yesterday and the release of the FOMC minutes from their recent meeting. A July rate cut seems set in stone as Powell cites geopolitical uncertainties and global growth slowdown as the reasons why an easier policy will help sustain the expansion domestically. The higher beta currencies rallied versus the greenback while the safe haven Yen and Franc also advanced. Equities were relieved that the Fed plans to cut rates alongside Gold that moved back above the $1,400 psychological level. Oil also climbed over $60 as US inventories drop, tensions in the Strait of Hormuz persist and a hurricane warning threatens Gulf of Mexico’s output.

In our note yesterday we explained the reasons why we thought that Powell would have little choice but to prepare the markets for a rate cut at the end of the month. And the head of the Fed didn’t disappoint us as he spent most of his time in front of the House’s Financial Services panel to speak about the unstable geopolitical environment and how it takes its toll on productivity domestically and abroad, hence hinting on the necessity of an insurance cut. What’s more important though is that his remarks didn’t vindicate those calling for a series of rate reductions but rather suggested that an “one and done” approach, as we called for yesterday, is what’s appropriate.

The takeaway for the Dollar was clearly bearish but there was no selloff on the back of his testimony. As we mentioned yesterday “investors already expect some kind of response from the Fed and we don’t think that too many of them were swayed by the strong NFPs to put their money behind a material delay in easing” and the price action following the event seems to fall in line with this thesis. Going forward, and with a July cut pretty much priced in, the host of fresh US data will help shape expectations for either a singular move in July or a continuation of easing until the end of the year.

In that regard, the release of the US inflation figures today will be closely monitored. If inflation continues to remain subdued - and today’s figures will probably show that - then a series of moves from the Fed may be needed to create an easier monetary environment and spur prices’ pressures. However, we believe that the notion that the Fed will proceed with more a aggressive 50bps reduction at this time is too far-fetched. US interest rates are way off their historic highs and, despite the need for a looser regime, Fed’s actions need to be timed well given that there’s not too much room available to the downside.

On that note, it will be very interesting to see how Powell will respond to those still suggesting that a 50bps move is needed during his second day of testifying to Congress. Should he make it clear that the Fed is not prepared to go that far so soon, then we may see a bounce from the Dollar against its peers.

Elsewhere, Gold hit out $1,425 price target following yesterday’s event. Now, the way forward for the yellow metal pretty much depends on the fresh US data - that will leave the door open for more rate cuts or suggest otherwise - but also on how inflation fares. The US Consumer Price Index report will play a role in that regard but we continue to keep our eye on Oil prices as well. The tensions between the US and Iran still persist and this could continue pushing Oil higher, which in turn elevates inflation expectations and supports the bullish case for Gold in the longer term.

Finally, equities were mixed yesterday with Europe closing in the red but the US markets were able to climb higher after hearing from Jerome Powell. Clearly, an easier monetary policy is a much needed bullish driver for stocks and futures on either side of the Atlantic are pointing higher this morning after Powell made it clear he’s pulling the trigger in July. Will this bullish bias last? We think that the earnings season kicking off over the next few days will be telling and we’ll be talking more about this as the results start coming in.


  • US Consumer Price Index - 4.30pm
  • Fed Chairman Powell Testifies Before Senate Banking Committee - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research