Published: Fri, July 12, 2019
Markets | By Erika Turner

NZ dollar rides higher on Powell's dovish testimony

NZ dollar rides higher on Powell's dovish testimony

-China trade, softening economic growth and muted inflation.

But relentless pressure from President Trump for a Fed rate cut could complicate matters for a central bank that prizes its independence. "These concerns may have contributed to the drop in business confidence".

At the moment, the US economic landscape is a mixed one: The job market appears resilient, but economic growth is slowing. But the economy is likely slowing.

"The markets had hoped for Powell to express dovish views and they got what they wanted", said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management.

The comments come amidst heightened tensions between Powell and the president, who's repeatedly lashed out at the USA central bank for raising interest rates too frequently in 2018 - while also urging policymakers to cut rates at the upcoming July meeting.

"Powell could either reinforce market expectations for a rate cut or rein them in", analyst Jesse Cohen said.

"The Fed's consideration of rate cuts is not only about growth but also about inflation, which remains well below target, and inflation expectations, which were breaking to the downside before the Fed signaled the likelihood of cuts".

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Powell will appear before the Senate Banking Committee on Thursday for a second day of testimony.

While strong data last week led investors to trim bets of a 50 basis points rate cut by the Fed in July, Powell's remarks saw interest rate futures pricing in greater odds of an aggressive rate cut this month. "He's not doing that".

"And you would not pack up and you would not leave?" If Trump called and asked him to resign, Powell said, "Of course, I would not do that". He contends that the central bank made a huge mistake by tightening credit too much last year and should be cutting rates now, arguing that last year's rate hikes have hurt economic growth and depressed the stock market.

While the US Dollar has firmed over the past week, the Pound Sterling to US Dollar (GBP/USD) exchange rate has recovered this week's losses as the US Dollar's (USD) recent gains were seen as overdone in the face of a more dovish Federal Reserve. But over the last decade, the Federal Reserve has been banging the inflation beehive with a baseball bat and the bees haven't come out.

Powell was later asked by Carolyn Maloney, Democratic representative from the state of NY, if the Fed considers a half-percentage-point lowering of the benchmark interest rate during the July 30-31 FOMC meeting. Until very recently, the chance of a modest quarter-point cut was put at 70% and a steep half-point cut at 30%.

Bets that the Bank of England (BoE) could cut United Kingdom interest rates instead of hike them have been rising lately, keeping the Pound highly pressured. "There was little in the statement to imply what this means past the July meeting, but we can infer that any further softening in the data past July will likely mean more action from the Fed at subsequent meetings". But almost all now foresee only a quarter-point move.

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