Dollar Hovers Near Three-Week Lows Amid Powell’s Cautious Tone

The US dollar remained near three-week lows as Federal Reserve Chair Jerome Powell adopted a cautious stance during his testimony to Congress, highlighting the need for “greater confidence” in declining inflation before considering a rate cut. Powell acknowledged the cooling labor market, but the upcoming Consumer Price Index (CPI) report for June will be crucial in determining the timing of any potential rate adjustments.

Key Developments:

• Dollar Index: The dollar index remained largely unchanged at 105.09, after a slight rise on Tuesday. It had previously dipped to its lowest level since June 13 due to unexpectedly soft US payrolls data.
• Rate Cut Expectations: Traders currently anticipate a 73% probability of a rate cut by September, with a second reduction mostly priced in by December.
• Euro: The euro held steady at $1.0815, below Monday’s one-month high, as investors monitored the political situation in France following the surprise election win of the leftist alliance.
• Kiwi: The New Zealand dollar was the weakest performer, falling 0.9% to $0.6071, after the Reserve Bank of New Zealand (RBNZ) indicated the possibility of rate cuts if inflation slows as expected. This marked a shift from the previous meeting in May, where the RBNZ had hinted at a potential additional rate hike.
• Australian Dollar: The Australian dollar rose 0.5% against the New Zealand dollar, reaching NZ$1.1065 for the first time since February 2023. It remained relatively flat against the US dollar at $0.6738.
• Yen: The dollar gained 0.1% against the yen, reaching 161.515, as traders awaited the Bank of Japan’s (BOJ) upcoming meeting. Sources suggest the BOJ may revise down its economic growth forecast for this year but maintain an inflation projection around the 2% target, leaving the possibility of a rate hike this month open.

Overall, the currency market appears to be in a holding pattern ahead of the CPI report, which could influence investor sentiment regarding the timing of the first US rate cut. The New Zealand dollar’s weakness following the RBNZ’s dovish stance and the potential for a rate hike by the BOJ are also noteworthy developments in the currency landscape.