Morning Commentary: Laying the Groundwork

Foreign Exchange - Morning Commentary

Laying the Groundwork

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Today and tomorrow will be critical days for the markets. Fed Chairman Powell will be going before Congress to give his semi-annual testimony about the state of the U.S. economy. Today, he will be questioned by the House of Representatives and tomorrow by the Senate. We can anticipate questions concerning the state of the economy, Fed monetary policy, U.S. debt levels, inflation expectations etc. along with a wide variety of questions covering almost everything else under the sun.
Chairman Powell speaks at 7:00 am PST but released his opening statement today at 5:30 am PST. His opening statement was clearly tilted toward the dovish side as he pointed out continuing uncertainties since the June FOMC meeting that are dimming the economic outlook. He also pointed out that “inflation pressures remain muted.” Markets have reacted quickly to these opening comments as they reinforce the expectations for a rate cut later this month and potentially additional rate cuts down the road.
U.S. interest rates have reversed their upward correction over the past days and are all lower with the U.S. 2-year yield down the most by 5 bps to 1.85%. U.S. equities are expected to open higher, and commodity prices are all stronger with gold and oil up sharply on the session.  The U.S. dollar is weaker after five days of gains with commodity-linked currencies leading the way.
A word of caution regarding the initial reaction to his opening statement: there will be a wide variety of questions today and there will potentially be slightly different responses from Chairman Powell as he attempts to clarify the Fed’s stance on many key issues.  Expect and anticipate volatility throughout the Q&A today and tomorrow.
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