Jerome Powell's Remarks Shake the USD & Euro Gains Momentum

USD: Powell's Take on Inflation and Its Impact on the Dollar

Federal Reserve Chair Jerome Powell recently spoke at the ECB’s Central Bank Forum in Sintra, expressing a cautious optimism about inflation. His remarks led to a slight decline in the US dollar, continuing its drop from the recent high of 106.13. Despite this, the USD/JPY reached a year-to-date high of 161.94 overnight.

USDJPY Daily Chart

 Source: Finlogix Charts Powell highlighted a continued trend of disinflation in the US but stressed the need for more data before considering rate cuts. He mentioned that a sudden weakening in the labour market could lead to earlier rate cuts, reflecting the Fed’s balanced approach to economic risks. He noted progress in reducing inflation, thanks to restrictive policies and improved supply-side conditions, and projected inflation to stabilize between 2.0-2.5% within a year. However, he did not provide specific timelines for potential rate cuts, citing the strength of the US economy and labour market as reasons for the Fed's patient stance.

Powell also raised concerns about the labour market, pointing to signs of cooling. The latest JOLTS report showed a slight rise in job openings in May, after sharp declines in previous months, with openings now at their lowest level since early 2021. The quits rate remained at its lowest since late 2020, indicating moderating wage growth. Despite this, nonfarm payroll data has not shown a significant slowdown in employment growth. The Fed suggested that nonfarm employment figures might overstate the labour market’s strength, averaging around 250,000 jobs per month this year. For the upcoming nonfarm payroll report for June to significantly impact Fed rate cut expectations, a notable slowdown in job growth would be necessary.

Currently, the market is pricing in 18 basis points of Fed cuts by the September FOMC meeting and 45 basis points by year-end. Powell expressed satisfaction with the unemployment rate holding at 4.0%, which has been gradually increasing, adding pressure on the Fed to consider rate reductions. The outlook for lower US inflation and a softer labour market points to a forecast of a slightly weaker US dollar moving into next year.

EUR: Market Dynamics and Political Developments

The euro has held its ground against the US dollar at the start of this month. After hitting a low of 1.0666 late last month, EUR/USD rose to 1.0776 on Monday following the first round of the French elections, causing a relief rally. After last night of really and data from USA the dollar lost its ground and it was time for the EUR to shine, EURUSD had a high at 1.08168, the pair has since retreated towards the 1.0700 level.

EURUSD H1

 Source: Finlogix ChartsThe bond market saw a more noticeable impact, with the yield spread between 10-year French and German bonds narrowing to about 71 basis points from a peak of 82 basis points last month. This reflects increased investor optimism that the far-right RN party will not secure a parliamentary majority. Reports indicate that many third-placed candidates have withdrawn from the race, reducing the number of three-way races and making it harder for the RN party to win. The alliance between centrist and left-leaning parties to withdraw third-placed candidates strengthens the euro’s position ahead of the second round of elections on July 7th.

Comments from ECB officials at the Central Bank Forum in Sintra have also influenced the euro’s performance. ECB President Christine Lagarde and Chief Economist Philip Lane both suggested that another back-to-back rate cut this month is unlikely. They emphasized the need for more evidence of a sustained inflation slowdown before committing to further rate cuts. The latest euro-zone CPI report showed core inflation holding at 2.9% in June unexpectedly. Despite this, the ECB is still expected to implement a second rate cut in September, depending on upcoming inflation data.

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