Spotlight falls on Fed Chair Powell’s testimony

The dollar continued losing ground against most of its major counterparts on Monday, gaining somewhat only against the franc and the kiwi.

With no major catalysts to drive the world’s reserve currency yesterday, traders may have maintained some of their short positions initiated after Friday’s employment report corroborated the notion of two Fed rate cuts by the end of the year.

Today, the spotlight is likely to turn to Fed Chair Powell’s semi-annual testimony before the Senate banking committee. He will deliver the same report on Wednesday before the House financial services committee.

Last week, at the ECB forum on central banking in Sintra, Portugal, Powell said that they are getting back on “the disinflationary path,” adding though that they want to be more confident about inflation’s return towards their 2% target before they start loosening policy.

With that in mind, he is unlikely to deviate much from what he said last week, especially after Friday’s evidence of a further cooling in the labor market. Even if he insists that they would like to see further progress on inflation, should he highlight again that recent data indicates inflation is entering a downward path, the dollar is likely to suffer a bit more.

However, any Powell-related slide is unlikely to be massive as the market is now fully pricing in two rate cuts by December, already assigning an 80% chance for the first cut to be delivered in September.

Elsewhere, the euro finished Monday well in the green, despite opening with a negative gap after the elections in France resulted in a hung parliament. Perhaps investors re-examined the outcome and concluded that although a hung parliament could lead to political gridlock, it also lessens concerns stemming from far-right or far-left fiscal agendas.

The yen traded virtually unchanged against its US counterpart after dollar/yen found support near the key zone of 160.35. Today, the BoJ began holding in-person meetings with Japanese government bond (JGB) market participants, banks, securities firms and bond buyers for financial institutions, aimed at figuring out a realistic pace for reducing its own JGB purchases.

The Bank will announce the reduction plan at its upcoming meeting, but what could really shake the yen may be whether policymakers will hit (or not) the rate hike button. Currently, investors are assigning a 60% chance for a 10bps hike this month.

On Wall Street, both the S&P 500 and the Nasdaq continued conquering uncharted territories and they may continue doing so if Powell satisfies investors’ rate cut bets. But with the earnings season beginning on Friday, traders may turn more cautious towards the end of the week, thereby resultig in a small setback.

Despite the greenback extending its slide, gold traded lower, perhaps on reports that China didn’t make any purchases in June following a reserve freeze in May. The precious metal slipped and hit the $2,350 zone, but in no way did the retreat suggest that the outlook has turned bearish.

Fed rate cut expectations could soon help the price rebound, while the risk of a Trump election in the US may prompt China to reaccelerate its purchases on concerns of worsening US-China relations. Policymakers may continue eliminating their dollar dependency to minimize the economic damage in case the US decides to weaponize its own currency.