In the recent Powell testimony before Congress, Federal Reserve Chair Jerome Powell emphasized that maintaining high-interest rates for an extended period could jeopardize economic growth. This statement has captured the attention of traders and investors, highlighting the delicate balance the Fed must maintain between curbing inflation and supporting economic activity.
Powell Testimony Highlights Concerns Over High Rates
Federal Reserve Chair Jerome Powell expressed concerns about the potential negative impact of holding interest rates too high for too long. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment,” Powell remarked during his appearances on Capitol Hill.
This commentary coincides with the approaching one-year anniversary of the last time the Federal Open Market Committee raised benchmark interest rates. Currently, the Fed’s overnight borrowing rate sits in a range of 5.25%-5.50%, the highest level in about 23 years, following 11 consecutive hikes after inflation peaked since the early 1980s.
Market Reactions and Expectations
Markets are anticipating the Fed to start cutting rates in September, with a potential additional quarter percentage point reduction by the year’s end. However, FOMC members have indicated a preference for just one cut, as communicated during their June meeting.
US Dollar and Stock Market Movements
The US Dollar remains steady without significant movement, hovering around the 105.00 mark. Traders are closely monitoring multiple Fed speakers, including Powell, for any new insights. Despite Powell’s testimony not introducing new angles, the market remains cautious, keeping the USD afloat and stock markets seeing mild gains.
EUR/USD and GBP/USD Trends
EUR/USD
The EUR/USD pair continues its bullish stance near the 1.0830 level following Powell’s testimony. The ongoing selling bias in the Greenback has allowed the EUR/USD to advance modestly amidst Powell’s remarks.
GBP/USD
The GBP/USD pair is flirting with monthly peaks near 1.2840, buoyed by Powell’s second testimony. The pair edged lower during the American trading hours but remains steady near 1.2800 in the European session, as investors await further fundamental drivers.
Gold Prices
Gold prices have added to recent gains, approaching $2,390 per ounce on the back of renewed selling pressure in the US Dollar. Despite Powell’s lack of commitment to a specific timeline for interest-rate cuts, his acknowledgment of progress on inflation and a balanced approach to rate policy has supported gold prices.
China’s Inflation Update
June CPI Inflation
China’s consumer price index (CPI) inflation slowed to a three-month low of 0.2% YoY in June, driven by softer-than-expected non-pork food prices. This marks the fifth consecutive month of positive inflation, although inflationary pressures remain subdued.
PPI Inflation
Producer price index (PPI) inflation showed a slightly more favorable read, with a smaller contraction of -0.8% YoY, reaching a 17-month high. Producer prices have been in deflation since September 2022 but are expected to exit deflation in the second half of the year if the current trajectory holds.
In conclusion, Jerome Powell’s testimony has provided critical insights into the Fed’s current stance on interest rates and the broader economic outlook, influencing various asset classes and market expectations. Traders are advised to stay informed and agile in response to these developments. Tomorrow traders will be waiting for the U.S. Inflation data.
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