This Week’s #1 Event Risk

Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup July 8, 2019

U.S. dollar bulls remain in control with the greenback extending its gains against all of the major currencies. Friday’s nonfarm payrolls report sparked a broad-based recovery in the greenback. With no US economic reports scheduled for release Monday and Tuesday, the dollar held onto its gains as investors wait for its next catalyst – Federal Reserve Chairman Powell’s semi-annual testimony on the economy and monetary policy. There’s no question that this is the most important event risk of the week. It could determine the market’s appetite for U.S. dollars not just for the next week but for the rest of the month ahead of the July 31 FOMC meeting. Before the jobs report, Fed fund futures were pricing in 75% chance of a quarter point cut this month and 25% of a half point cut. Today, those odds have shifted to 95% chance of July cut and an 80% chance of a second cut by late October.

The big question for Fed Chairman Powell and all of the other central bankers scheduled to speak this week is whether a July cut is necessary at all given the latest jobs report. At their last monetary policy meeting, the Fed made it very clear that easing is data-dependent. Since then, job growth rebounded sharply but the unemployment rate is up, wage growth is lower, home sales are mixed, confidence is down as manufacturing– and service-sector activity slowed. So outside of hiring, there’s been-broad based deterioration in U.S. data. The consumer price report, which is another key measure for the Fed, is scheduled for release on Thursday, but chances are Powell has those figures on hand before his testimony.

Given the overall tone of the most recent FOMC statement and the amount of time since his last Congressional testimony, we believe that Fed Chair Powell will spend a good portion of his time on Capitol Hill explaining why the central bank believes that the case for a rate cut increased significantly over the past few months. Back in February, the Fed was still thinking about tightening, the labor market was strong and Powell said the outlook for the economy was positive. Last month, the central bank dropped the word patient from their policy statement, said uncertainties increased and saw 8 FOMC members forecast a rate cut this year.

July easing seems like a done deal but the price action in the U.S. dollar suggests that forex traders are ill-prepared for negative comments from Powell on Wednesday. They hope that the better-than-expected employment report will push a rate cut to September or give the central bank the confidence to signal that a cut in July is all that the economy needs this year. If Powell’s testimony is laced with optimism, USD/JPY will break 109 and EUR/USD will sink well below 1.12. However if the Fed Chair focuses on the risks ahead and spends a large part of his testimony reviewing the slowdown in the economy, we could see USD/JPY u-turn and fall back below 107.50. EUR/USD could squeeze back above 1.13 but the biggest gains should be in the Swiss Franc and New Zealand dollars.

The weakest currencies were the Japanese yen and Swiss franc, which is no surprise considering that they are the most sensitive to the market’s appetite for U.S. dollars. The euro’s decline was helped by softer-than-expected German industrial production. The most resilient currency was the New Zealand dollar, which held steady after Friday’s slide. Looking ahead there are no major economic reports scheduled for release in the next 24 hours so we do not expect any big moves before Powell’s testimony.

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