U.S. Dollar Nears One-Month Low as Markets Await Powell’s Testimony
The U.S. dollar remained close to its lowest level in almost a month against major peers on Tuesday, still reeling from Friday’s unexpectedly weak jobs report. Traders are now looking forward to Federal Reserve Chair Jerome Powell’s testimony for indications on future interest rates.
Euro Holds Steady Amid French Political Gridlock
The euro maintained its position after significant fluctuations on Monday, as investors adjusted to a hung parliament in France. This outcome suggests potential political gridlock, which, while complicating legislative progress, mitigates fears of aggressive fiscal policies from far-right or far-left victories.
Dollar Index and Market Expectations
The U.S. dollar index, which measures the currency against the euro, sterling, yen, and three other major peers, remained flat at 104.99, near the overnight low of 104.80, marking a 3 1/2-week trough. The index dropped by 0.9% last week, partly due to Friday’s payrolls report, which increased expectations for the Fed to start cutting rates soon.
According to the CME Group’s FedWatch Tool, traders currently see a 76% chance of a rate cut at the September meeting, up from 66% a week ago, with another cut expected by December. Powell’s two-day testimony before Congress starts later on Tuesday with the Senate, followed by the House on Wednesday.
Upcoming Economic Data
Consumer price data, due on Thursday, is also expected to be crucial. Recent figures have shown a cooling from the unexpectedly high levels seen at the beginning of the year.
“All ears will be on how Powell communicates the risks between stubborn inflation and unnecessary labor market deterioration,” said Ray Attrill, head of FX strategy at National Australia Bank. He anticipates a long-term decline in the U.S. dollar.
Market Reactions to French Elections
Meanwhile, markets have taken a “fairly sanguine view” of the French election results, Attrill added. The political gridlock, with its associated fiscal policy inertia, is seen as a relatively benign scenario for France compared to other potential outcomes.
The euro edged up 0.06% to $1.08295, close to Monday’s nearly four-week peak of $1.0845, having dipped as low as $1.07915 earlier that day.
Sterling and Bank of England Expectations
Sterling traded flat at $1.2809, after rising to $1.28455 on Monday, its strongest since June 12. Bank of England policymaker Jonathan Haskel indicated he wanted to keep interest rates on hold due to inflation pressures in the jobs market.
Traders currently see a 61% chance of the BoE cutting rates on August 1, though analysts at Commonwealth Bank of Australia view these odds as too high.
“We have high confidence that interest rates will be left unchanged in August,” said senior currency strategist Kristina Clifton. “We favor a later start to the rate-cutting cycle in September because there is uncertainty around the strength of the labor market, and services inflation is still very high.”
Yen Stability and Bank of Japan Speculations
The yen was little changed at 160.945 per dollar, stabilizing after rebounding from Wednesday’s nearly 38-year low of 161.96. Increased speculation that the Bank of Japan may raise rates again on July 31, following its first hike since 2007 in March, has provided some support to the yen.
Japan’s central bank is also expected to announce a plan for quantitative tightening at its month-end policy meeting. It began two days of meetings with bond market participants on Tuesday to discuss how to proceed without unsettling the markets.
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