Daily FX Market Review: JPow Reports Inflation Progress, Eyes Future Rate Cuts

July 9, 2024 11:45 pm

Fed Chair Jerrome Powell (“JPow”) has started his two days of testimony in both houses of Congress: the Senate Committee on Banking, Housing, and Urban Affairs today and the House Committee on Financial Services tomorrow.

In the US, the Fed Chair is required to report to Congress twice a year. The Federal Reserve has a dual mandate to promote maximum employment and stable prices.

Testifying before Congress is a way to report on progress towards these goals and how the Fed plans to achieve them.

Topics under interrogation include future monetary policy and updates on the state of the economy, including growth, employment, and inflation.

The testimony allows for dialogue between the Fed and Congress, where lawmakers can voice their concerns, ask questions, and provide “feedback.”

In other words, an opportunity for them to bash or roast the Fed Chair on live television.

Powell’s appearance before Senate lawmakers was his second time this month making public remarks on inflation. Last Tuesday in Portugal, he mentioned that the latest inflation numbers from April and May suggest we’re moving towards lower inflation.

So what did he say this time?

Jerome Powell Testimony

During his Senate testimony, JPow highlighted the tricky balance the Fed faces between lowering inflation and keeping the job market strong.

He noted that while inflation is a big risk, the job market data shows it has cooled down quite a bit. Powell mentioned significant progress towards lowering inflation but said the timing of rate cuts is still up in the air.

The Fed is cautious about cutting rates too soon, which could spark inflation again, and also aware of the risks of keeping interest rates too high for too long, saying it could hurt economic growth.

Regarding inflation, he acknowledged that first-quarter data did not give them great confidence inflation was returning to their 2% target, but that the most recent inflation readings have shown some modest further progress and more “good data” would be needed to strengthen their confidence.

Powell also mentioned that growth has slowed down this year compared to last year, primarily due to slower but still solid consumer spending.

As for the jobs market, he described it as “strong, but not overheated,” with the higher unemployment rate resulting from more people looking for work rather than fewer jobs being available. Powell noted that recent job numbers send a clear signal that labor market conditions have cooled considerably.

(In a separate hearing in front of the House Financial Services Committee in Washington, Janet Yellen shared similar views as Powell’s. She described the labor market as strong but with fewer pressures that would create inflationary concerns.)

The main takeaway from all of this is that Powell has finally publicly admitted they’re now focusing more on when to CUT interest rates because balancing inflation and keeping the job market strong is becoming more challenging

The Fed wants to avoid causing a recession, so if upcoming data looks good, they will begin cutting interest rates in Septemeber.

The market is giving a September rate cut a 70% probability (compared to 63% a week ago).

If new data comes out to push this probability higher, look for USD to weaken.

The next important piece of data from the economic calendar is the Consumer Price Index (CPI), which comes out this Thursday.

Currency Market Movers

Let’s review the price action in forex today.

Which currency pairs gained the most today?

AUD/JPY was the leader of the pack, gaining 0.40% or 43 pips.

As shown by our FX Market Movers page, the top 5 gainers had pretty small gains.

Top FX Gainers | 07/09/2024

Looking at the AUD/JPY Trend Following Rating, it’s been showing a strong Bullish rating for almost a month.

AUDJPY Trend Following Rating | 08/08/2024

But the AUD/JPY Overbought/Oversold Rating is showing “Overbought” so be careful if you aren’t already long.

AUD/JPY Overbought | 2024-07-09

Which currency pairs lost the most today?

GBP/AUD was the biggest loser, falling 0.22% or 41 pips.

Top FX Losers | 07/09/2024

Currency Strength

What was the overall strength or weakness of individual major currencies today?

Based on the Currency Strength Meter on MarketMilk™, AUD was the strongest currency, while JPY was the weakest currency.

Currency Strength Meter | 2024-07-09

If we dive a little deeper and look at just how major currency pairs moved over the past 24 hours, we can see USD/JPY rallying during JPow’s testimony.

USD Pairs 24 Hours | 07/09/2024

Currency Short-Term Trends

When it comes to short-term trend strength, the Aussie dollar (AUD) shows the most bullish strength.

The Japanese yen (JPY)  shows the most bearish strength.

Keep an eye on the US dollar (USD), its trend has now entered bearish territory.

Currency Trend Strength | 07/09/2024

Currency Heat Map

If we take a look a look at our Currency Heat Map, we can see the continued weakness of JPY.

CHF is a currency to follow for continued weakness.

Currency Heat Map | 07/09/2024

Currency Volatility

Which currency was the most volatile today?

Based on our Currency Volatility Meter, it’s the Japanese yen (JPY).

Currency Volatility | 07/09/2024

Which currency PAIR was the most volatile today?

Given that JPY was the most volatile currency, it has to be a JPY pair. But which one?

USD/JPY. It moved over 0.49% or 78 pips.

Most Volatile Currency Pair | 07/09/2024

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