Published: Sat, July 13, 2019
Finance | By Kristine Clayton

USD Spikes Lower as Dovish Fed Powell Sets Stage for Rate Cuts

USD Spikes Lower as Dovish Fed Powell Sets Stage for Rate Cuts

The Federal Reserve has signaled it will cut interest rates at its July 30-31 meeting, with chair Jay Powell telling Congress on Wednesday that there is a "risk that weak inflation will be even more persistent than we now anticipate".

"Fed not only focused on concerns within the US economy, but also took into consideration the global economy, negative impact from trade wars and basically hitting all the right buttons for gold bulls". Many Fed officials historically would then support raising interest rates to forestall what was called a "wage-price spiral".

"Inflation appears to have stabilized and this will put a wrench in some Fed rate-cut bet forecasts", Edward Moya, senior market analyst at Oanda, wrote in a note.

Powell's testimony continues Thursday in front of the Senate Banking Committee starting at 10 a.m. ET. The S&P 500 is also tracking up 0.2%, while the Nasdaq could jump 0.3% one day after it hit a new closing record.

Economists surveyed by the Wall Street Journal expect the CPI to be flat in June from May and up 1.6 per cent from a year earlier, underscoring the Fed's concerns about weak inflation pressures.

While the U.S. economy has performed "reasonably well" this year, "crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook", Fed Chair Jerome Powell said in prepared remarks ahead of his two-day testimony before Congress.

The Fed, which has a 2% inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy.

The minutes said several FOMC participants noted that a near-term rate cut was "appropriate" from a risk-management perspective, as it "could help cushion the effects of possible future adverse shocks to the economy".

This year's rallies across stocks, bonds and credit got a fresh jolt on Wednesday thanks to comments from Powell that persuaded investors rates are headed lower by at least a quarter-point in July.

On inflation, Powell told the lawmakers that while it has been below the FOMC's symmetric 2 percent objective, "there is a risk that weak inflation will be even more persistent than we now anticipate".

Now, the only question is: By how much will the Fed lower borrowing costs at their Federal Open Market Committee meeting at the end of the month? On Thursday, July 11, the Labor Department reports on USA consumer prices for June.

Gyrations in equities earlier in the session showed how sensitive the market remains to trade-related developments.

Though encouraged by the signals from the Federal Reserve, investors remained concerned about relations between the U.S. and China in light of a tweet from President Donald Trump expressing disappointment with Beijing's failure to boost purchases from American farmers in line with the trade truce he agreed on with Chinese President Xi Jinping during last month's G20 summit.

The US Labor Department said on Thursday that its consumer price index (CPI) excluding the volatile food and energy components rose 0.3% in June. In Japan, the Nikkei 225 index climbed 0.5% to 21,643.53 and South Korea's Kospi advanced 1.1% to 2,080.58. Health insurers and drugs distributors also rose.

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