The dollar remained near three-week lows on Wednesday, influenced by a cautious tone from Federal Reserve Chair Jerome Powell that kept risk sentiment subdued. Meanwhile, the New Zealand dollar fell after the country’s central bank hinted at potential rate cuts.
In his first day of testimony to Congress, Powell stated that a rate cut would not be appropriate until the Fed gains “greater confidence” that inflation is moving towards the 2% target, setting the stage for Thursday’s consumer price index (CPI) report for June.
Powell acknowledged that the labor market, previously a major concern for Fed policymakers, is cooling. He emphasized that the Fed now faces “two-sided risks” and cannot focus solely on inflation.
The dollar index, which measures the U.S. currency against six others including the euro and yen, was relatively unchanged at 105.09 after a 0.1% rise on Tuesday. It had dipped to its lowest since June 13 on Monday, following unexpectedly soft U.S. payroll data.
According to the CME FedWatch tool, traders now see around a 73% chance of a rate cut by September, down from 76% a day earlier, with a second reduction mostly priced in by December.
With the upcoming CPI report potentially influencing investor expectations on the timing of the first U.S. rate cut, analysts believe the currency market will likely remain in a holding pattern.
“Powell didn’t really provide new information; he was quite cautious and reiterated what he said after the last meeting,” said Commerzbank FX strategist Michael Pfister. “The market is probably waiting for CPI, which is likely the most important event this week.”
After his Senate testimony, Powell is scheduled to speak before the House later in the day.
The euro held at $1.0815, below Monday’s one-month high, as investors prepared for political deadlock in France following a surprising election win for the country’s leftist alliance. The euro had been under pressure last month after the snap election was called but has since recovered some losses, although concerns about parliamentary gridlock keep investors cautious.
The New Zealand dollar was the biggest laggard among major currencies, down 0.9% at $0.6071, moving further from Monday’s three-week high of $0.6171. This decline came after the Reserve Bank of New Zealand suggested possible rate cuts if inflation slows as expected. While the RBNZ kept rates steady, as anticipated, it expressed confidence that inflation would return to its target range this year, prompting bets for early policy easing.
“There was a signal of greater confidence that inflation will return to target this year,” said Kyle Rodda, senior financial market analyst at Capital.com. “This sets the stage for a rate cut before the end of 2024. The markets were already implying it, but this dovish shift suggests it could come sooner.”
The Australian dollar surged 0.5% against its New Zealand counterpart, reaching NZ$1.1065 for the first time since February 2023. The Aussie was flat against the U.S. dollar at $0.6738, close to Monday’s six-month peak of $0.67615.
The dollar rose 0.1% to 161.515 yen, with the currency pair trading in a tight range ahead of the Bank of Japan’s meeting at the end of the month. Sources told Reuters that the BOJ would likely trim this year’s economic growth forecast in July but project inflation to stay around its 2% target in the coming years, keeping alive the chance of an interest rate hike this month.
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