Fed Chair Powell’s Speech Sends Shockwaves Through Forex Markets

Last Friday, Federal Reserve Chair Jerome Powell delivered a speech that reverberated through the financial markets, with the U.S. dollar bearing the brunt of the impact. In the days leading up to his address, the dollar had already been under pressure, slipping around 1.5% as various Fed officials hinted at possible interest rate cuts. Among those signalling this shift were Fed Presidents Bostic, Kashkari, Daly, Collins, and Harker, creating widespread anticipation that Powell would confirm the likelihood of a rate cut at the upcoming September meeting.

USDIndex 3% Drop 

 Source: TradingView Powell’s remarks didn’t just meet expectations—they amplified them. What stood out were the nuances in his delivery. Unlike the typically cautious and somewhat opaque language often used by central bankers, Powell’s tone was unusually direct and assertive. He left little doubt that a rate cut in September was almost a foregone conclusion.

Powell also turned his focus to the labour market, expressing heightened concern about its potential vulnerabilities. His statement that the Fed does not “seek or welcome” further weakening in employment, coupled with a commitment to do “everything we can” to support jobs, signalled a deeper level of worry about the economy’s health than previously conveyed. This raised the possibility that the Fed might opt for a more substantial rate cut—perhaps as much as 50 basis points—in September.

Interestingly, Powell’s speech lacked the confident tone that usually accompanies a series of moderate 25 basis point cuts. Instead, he emphasized that future decisions would hinge on incoming data and the evolving economic outlook. His pledge to support the labour market suggested that the Fed might be prepared to take more aggressive action, especially given that the labour market is no longer seen as a primary driver of inflation.

The impact of Powell’s speech was immediate and significant. Short-term Treasury yields plunged, and the dollar saw a sharp decline. Over the past 16 days, the dollar has dropped nearly 3.5%, marking its steepest decline since late 2022. This slide brought the dollar dangerously close to the lows it reached in December 2023 and July 2023. If it falls below the July 2023 low of 99.578, further downward pressure could ensue, particularly as the market looks ahead to the crucial jobs report on September 6th. A weak report could drive the dollar to levels not seen since the early stages of the global inflation shock in early 2022, making the upcoming Non-Farm Payroll (NFP) report a pivotal moment for the dollar’s trajectory.

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