· The dollar traded near a three-week high on Tuesday against its peers, as investors reduced bets on aggressive U.S. interest rate cuts ahead of the Federal Reserve chairman’s testimony to Congress on the economy.
Fed chief Jerome Powell’s comments in two-day testimony to Congress beginning on Wednesday will be closely watched to determine whether traders will continue to pare bets for deep interest rate cuts, which could help the dollar continue its rebound against major currencies.
The dollar index versus a basket of six major currencies was little changed at 97.374 on Tuesday, which was close to a three-week high of 97.443 hit on Friday.
The greenback was steady at 108.75 yen, near a six-week high of 108.81 yen reached on Monday.
· A sharp rebound in U.S. job growth in June reduced expectations that the Fed will cut interest rates by 50 basis points when it meets at the end of July.
A week ago, the market forecast an 80.1% chance of a 25-basis-point cut, and a 19.9% chance of a 50-basis-point cut, according to CME Group’s FedWatch tool. The chances are now 98% and 2%, respectively.
· Sterling was pinned near a six-month low versus the dollar on speculation the Bank of England will soon join other major central banks in easing monetary policy in response to growing worries about the global economy and Britain’s exit from the European Union.
The British pound was last quoted at $1.2515, within striking distance of $1.2481, its lowest since the “flash crash” on January 3 when the pound dropped to $1.2409.
The euro traded at $1.1216, near a three-week low of $1.1207.
· US dollar bulls remain in control with the greenback extending its gains against all of the major currencies.
The big question for Fed Chairman Powell and all of the other central bankers scheduled to speak this week is whether a July cut is necessary at all given the latest jobs report.
Given the overall tone of the most recent FOMC statement and the amount of time since his last Congressional testimony, we believe that Fed Chair Powell will spend a good portion of his time on Capitol Hill explaining why the central bank believes that the case for a rate cut increased significantly over the past few months
July easing seems like a done deal but the price action in the US dollar suggests that forex traders are ill prepared for negative comments from Powell on Wednesday. They hope that the better than expected employment report will push a rate cut to September or give the central bank the confidence to signal that a cut in July is all that the economy needs this year. If Powell's testimony is laced with optimism, USD/JPY will break 109 and EUR/USD will sink well below 1.12. However if the Fed Chair focuses on the risks ahead and spends a large part of his testimony reviewing the slowdown in the economy, we could see USD/JPY u-turn and fall back below 107.50. EUR/USD could squeeze back above 1.13.
· USD/JPY is looking north with the daily chart reporting a bullish reversal pattern.
The currency pair closed at 108.72 on Monday, confirming an inverse head-and-shoulders breakout. The pattern marks a successful transition from bearish lower highs, lower lows pattern to bullish higher lows and higher highs pattern.
Put simply, the path of least resistance is now to the higher side. The pair, therefore, could test and possibly break above the 50-day moving average (MA), currently at 108.97.
Supporting the bullish case is the above 50-reading on the 14-day relative strength index.
As of writing, the spot is trading at 108.83, representing 0.10% gains on the day. A close below 108.44 would invalidate the inverse head-and-shoulders breakout.
· The United States and China are set to relaunch trade talks this week after a two-month hiatus, but a year after their trade war began there is little sign their differences have narrowed.
But sources familiar with the talks and China trade watchers in Washington say the summit did little to clear the path for top negotiators to resolve an impasse that caused trade deal talks to break down in early May.
A U.S. official said last week the discussions were expected to resume with a phone call between U.S. Trade Representative Robert Lighthizer, Chinese Vice Premier Liu He and Treasury Secretary Steven Mnuchin.
· The U.S. government on Monday said domestic producers were being harmed by imports of fabricated structural steel from China and Mexico, and that it would instruct the customs agency to collect cash deposits from importers of such steel.
The U.S. Commerce Department said it had found that imports from Canada were not being unfairly subsidized.
A preliminary subsidy determination announced on Monday by the United States affecting some Mexican steel does not put the ratification of a North American trade deal in danger, a senior Mexican official said.
· Deutsche Bank has made the first of the 18,000 job cuts announced on Sunday as part of a radical reorganisation.
Staff working in share trading in London, New York and Tokyo were told that their jobs were going.
In London, some staff stayed away from work after being told their passes would stop working at 11:00.
A spokesperson said the aim of the changes, which will shrink its investment banking business, was to make the bank "leaner and stronger".
Deutsche Bank is yet to specify the details of the job cuts, but it will pull out of activities related to trading shares, much of which takes place in London and New York.
· Officials from Japan and South Korea plan to hold talks as early as this week on Japanese export restrictions that have escalated a diplomatic row between the Asian neighbors, the Yomiuri newspaper reported on Tuesday.
The talks would take place in Japan, the Japanese daily reported without citing sources.
· Hong Kong leader Carrie Lam said Tuesday that the controversial extradition bill that has led to mass protests in the city is “dead.”
Addressing the weeks-long drama during a news conference, she reiterated that there is no plan to restart the legislation. She described the work to amend the bill as a “total failure.”
Lam, meanwhile, said she took full responsibility for what has happened in the city, according to a translation of her address.
· Oil prices dipped on Tuesday on demand concerns following the latest signs the U.S.-China trade war is dragging on the global economy, although the potential for conflicts in the Middle East offered support.
Brent crude futures were down 14 cents, or 0.2%, at $63.97 a barrel by 0524 GMT. They fell 12 cents on Monday.
U.S. West Texas Intermediate crude futures were down 20 cents, or 0.4%, at $57.46 a barrel. They rose 15 cents in the previous session.
Oil prices are being pressured by worries about demand as the U.S.-China trade war, heading into its second year, dampens prospects for global economic growth, which affects oil demand. The countries are the world’s two largest oil consumers.
Reference: Reuters, CNBC, FX Street
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