FX Considerations Ahead Of Powell’s Testimony

Thin summer trading volumes will sustain a brief jolt as Fed Chair Powell testifies to Congress today (testimony starts at 15:00 London time but speech is released 90 mins before i.e. 8:30 Eastern/13:30 London) and tomorrow. The testimony and ensuing Q&A will shed further light on the probability of a rate cut later this month. It may be too soon for Powell to hint at the magnitude of the rate cut for Jul 31, but is it too soon to guarantee a rate cut at all for this month?

FX traders bear in mind the following: Powell has already stated the economic slowdown goes beyond the retreat in global trade i.e. not limited to the trade war. USD bulls argue that any rate cut would only be a one-time adjustment instead of an extended round of easing. USD bulls will also state that the magnitude of the rate cut does not matter because the ECB will inevitably follow with rate cuts and/or policy stimulus.

USD bears could point to the fact that the Fed has never conducted a policy easing shorter/smaller than two or three rate cuts over the last 30 years. Additionally, limited or no Fed easing will exacerbate the disinflationary challenge from USD strength. Powell can’t afford to get his price stability objective off the market.

Regardless of Powell’s message, it will be unlikely for him to be so committal 21 days before the Fed decision, during which we’ll get a few more vital macro data points. While trading opportunities should return, no trend-breaking moves are expected.

As important as the speech will be, do not disregard the Q&A with congressmen today and tomorrow, which could lead to several potentially market-moving unscripted remarks/answers from Powell.

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