On Tuesday, the U.S. dollar saw gains ahead of Federal Reserve Chair Jerome Powell’s anticipated testimony before Congress, where investors sought fresh insights on potential interest rate adjustments amidst signs of a slowing economy.
Market expectations focused on a potentially dovish stance from Powell, especially as recent data indicates softening in the labor market and inflation edging closer to the Fed’s targeted 2% annual rate. Following the Fed’s June meeting, officials projected just one rate cut for the year in their “dot plot” of interest rate expectations. This was a notable shift from earlier forecasts in March, which had suggested three potential cuts amid higher-than-expected inflation in the first quarter.
Marc Chandler, chief market strategist at Bannockburn Global Forex, noted that Powell is likely to acknowledge the evolving nature of the “dot plot,” which may no longer fully reflect current economic conditions. Powell is expected to highlight incoming data that supports the Fed’s growing confidence in an economic slowdown and a return of inflation towards its target.
In response to Friday’s jobs report, traders have adjusted their expectations, now pricing in the likelihood of two rate cuts by December, with the first potential reduction anticipated as early as September.
Looking ahead, Thursday’s release of the U.S. consumer price index for June will be a focal point, with expectations set at a 0.1% rise in headline prices and a 0.2% increase in core prices month-on-month. This would translate to annual gains of 3.1% and 3.4%, respectively, reflecting ongoing inflationary pressures.
In the foreign exchange market, the dollar index, which measures the U.S. dollar against major currencies like the euro and yen, edged up by 0.11% to 105.08, rebounding from Monday’s low of 104.80, the weakest level since mid-June. The euro faced slight downward pressure, settling at $1.0814 after reaching $1.0845 on Monday, following the uncertainties surrounding France’s hung parliament.
Meanwhile, the European Central Bank’s governing council member Fabio Panetta indicated that gradual interest rate reductions could continue without jeopardizing the current inflation decline, despite making no firm commitment on further rate cuts following June’s initial reduction.
Elsewhere, the dollar strengthened against the Japanese yen, climbing by 0.19% to 161.11 yen, maintaining levels below a recent 38-year high of 161.96 yen reached last week. Sterling held steady, gaining 0.02% to $1.2806.
In the cryptocurrency market, bitcoin saw a 1.95% increase to $57,358, reflecting ongoing volatility and investor interest in digital assets amid broader market movements.
As Powell’s congressional testimony and economic data releases continue to shape market sentiment, investors remain attentive to developments that could influence future Fed policy decisions and global market dynamics.