After Federal Reserve Chair Jerome Powell’s testimony before the House Financial Services Committee, market observers noted his cautious stance on immediate rate cuts and his persistence in data-driven decision making. Despite signs of disinflation in the US economic outlook, the markets remain confident in a potential rate cut in September. Powell’s reluctance to commit to specific inflation numbers and his emphasis on monitoring the labor market have left investors on edge.
Investors are eagerly awaiting the release of June’s Consumer Price Index (CPI) data on Thursday for clearer guidance on inflation expectations. Projections suggest a slight decline in the headline CPI YoY, while core inflation is expected to remain steady. Market sentiment shows low expectations of a July rate cut, with higher betting odds for a cut in September according to the CME FedWatch Tool.
The US Dollar (measured by the DXY index) saw minor downturns following Powell’s remarks, slipping to 105.00. From a technical viewpoint, indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are showing negative signs. Despite Wednesday’s setback, the DXY managed to hold above its 100-day Simple Moving Average (SMA), with support levels at 104.50 and 104.30 acting as barriers against further declines. To regain momentum, buyers must push past the 105.50 level to retest 106.00.
Inflation measures the change in the price of goods and services over time, with core inflation excluding volatile elements such as food and fuel. Central banks target core inflation at around 2%, adjusting interest rates in response to changes. Higher interest rates due to high inflation can strengthen a currency, while lower inflation tends to have the opposite effect. Gold, traditionally a hedge against inflation, may see reduced demand in times of high inflation due to higher interest rates making it less attractive compared to other investments.
Overall, Jerome Powell’s cautious comments have influenced market expectations regarding future rate cuts and inflation trends. The upcoming CPI data release will provide further clarity on inflation expectations and potential monetary policy decisions. Technical analysis of the USD suggests a delicate balance, with support levels in place to prevent significant declines. Understanding the relationship between inflation and currency performance is crucial for investors navigating changing market conditions.