Powell still sees rate cuts this year, ECB enters the spotlight

Dollar slides as Powell adds to rate cut hopes

The US dollar extended its decline against its major peers yesterday, with the commodity-linked currencies aussie, kiwi, and loonie gaining the most. The greenback remains in a sliding mode today as well, but the currency leading the pack now is the yen.

The world’s reserve currency has come under selling interest after the ISM manufacturing and non-manufacturing PMIs raised questions about the performance of the US economy, and continued its downward trajectory as, while testifying before the House Financial Services Committee, Fed Chair Powell said that if the economy evolves as projected, “it will likely be appropriate to start dialing back policy restraint at some point this year.”

Although this is not new information, the fact that Powell did not clearly push back against market expectations – like he did at the press conference following the last decision – disappointed those who recently had begun to believe that even June may be too early for the Committee to start lowering interest rates.

Dollar traders are now likely to turn their gaze to tomorrow’s jobs data as they try to clear the fog over when the easing process may begin. According to Fed funds futures, there is almost an 85% probability of a 25bps reduction in June. But should Friday’s job numbers point to another month of solid employment gains and stickier-than-expected wage growth, that probability may be notably reduced.

Yen rebounds on BoJ chatter

The yen rebounded yesterday after a report said that the Bank of Japan may hint the end of negative interest rates at its March gathering, with the currency accelerating its advance today on new hike chatter.

A new report hit the wires today saying that the BoJ has approval from government officials to exit negative interest rates soon, while board member Nakagawa joined forces with Takata in saying that the economy is making progress towards achieving the Bank’s 2% objective. On top of that, Japan’s largest industrial labor group said that 25 of its member unions have already seen their wage demands being met in full, which significantly adds to the probability of an exit from negative interest rates very soon.

The Canadian dollar was yesterday’s main gainer, boosted by the BoC monetary policy decision. Canadian policymakers decided to keep interest rates unchanged as expected, but the statement accompanying the decision and Governor Tiff Macklem himself signaled concerns about high underlying price pressures, adding that more progress is needed before they start considering rate cuts.

Euro traders lock gaze on ECB

The central bank torch on Thursday will be passed to the ECB. Despite the Eurozone’s loss of economic momentum and the slowdown in inflation, policymakers have been repeatedly noting that it is not time to start lowering rates yet and that acting earlier may risk refueling inflation. Therefore, with the market almost fully pricing in a first quarter-point reduction in April, a message of patience from Lagarde and her colleagues could prompt market participants to scale back their ECB-related bets and thereby support the euro.

Stocks gain on Powell’s remarks, gold climbs to new record

On Wall Street, all three of its main indices rebounded as Powell added to hopes for rate cuts this year. Nonetheless, this doesn’t mean that a strong employment report on Friday will result in a pullback if market participants lift somewhat higher their implied rate path.

On the contrary, stocks could gain on signs that the US economy continues to perform well. After all, following the disappointing ISM services PMI, all three major indices slid instead of rising on hopes of earlier rate cuts. What’s more, the fact that Nvidia hit a new record high yesterday suggests that there may be more AI-related future growth opportunities to be priced into the markets, which means that any future pullbacks on Wall Street are likely to stay limited and short lived.

Gold continued flying, hitting a new record high today, perhaps as it received extra support from the dollar’s weakness and the retreat in Treasury yields. However, gold’s rally appears to be disproportionate to the reaction in the dollar and yields, suggesting that even if the dollar rebounds on tomorrow’s NFP report, the metal could remain in high demand.