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  • USD/JPY lower as Powell cements the notion that a  rate is warranted in the near term.
  • The downward pressure could ease on a recovery above 108.70.

USD/JPY is currently trading at 108.14, printing fresh lows in Asia as the dollar continues to slide.  Powell’s testimony weighed on both US yields and the greenback.  As for the yields, the US 2-year treasury yields fell sharply in response to Powell, from 1.92% to 1.82%. The 10-year yields fell from 2.10% to 2.04% and markets are now pricing 32bp of easing at the July meeting which is up from 27bp yesterday. The dollar fell to test the bottom of the 97 handle. USD/JPY fell from 108.95 to 108.35 overnight.  

Fed chair Powell delivered a dovish testimony to Congress, rubber stamping a rate cut and the expectations for beginning 31 July.  Analysts at Westpac explained that Powell said that while their baseline for solid growth is still intact, uncertainties including trade, the US debt ceiling and Brexit have increased:

“Powell also cited slowing momentum in the global economy and said incoming data since their June meeting suggests the outlook has dimmed: “Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook “.

Markets had clawed back expectations for Fed easing following the strong June labour market report, but during the Q&A Powell said that the report did not shift their outlook and reiterated that the data since June continued to disappoint.

Powell also said that low inflation might prove more persistent, a change of tack from several months ago when he said low inflation was likely transitory. Chair Powell did not commit to a specific timeframe, but a 25bp rate cut at the next FOMC meeting on 31 July is all but certain barring exceptionally strong data in the next several weeks. The 18-19 June FOMC meeting minutes underscored the Fed’s easing bias, “many” judging that additional monetary accommodation would be warranted in the near term if uncertainties persist.”

FOMC Minutes and key points

Then came along the FOMC Minutes. Prior to the Minutes.  The  minutesessentially  repeated what Powell already said in his testimony earlier today.

  • A rate is warranted in the near term.
  • Could be appropriate if incoming data showed continued deterioration.
  • Growth and inflation risks are now weighted to the downside.  
  • Many Fed officials saw stronger rate cut case of mid-rising risks.
  • Many Fed officials in June saw  risks weighted to the downside.
  • No decision was taken at the June FOMC on standing repo facility.
  • Several officials didn’t yet see a strong rate cut case.
  • Many officials sought more Fed accommodation warranted near-term.
  • A few Fed officials saw rate cut risking financial imbalances.
  • Several officials sought near term cut as a cushion for shocks.
  • Many saw inflation expectations inconsistent with 2% goal.
  • Only a couple of Fed policymakers favoured cutting interest rates at June meeting.
  • Many participants said growth and inflation risks had shifted notably in the weeks ahead of the meeting and were now weighted to the downside.
  • Officials focused on global risks and discussed at some length salt business investment data from the 2nd quarter.

USD/JPY levels

Valeria Bednarik, the Chief Analyst at FXStreet, explained that in the 4 hours chart:

“The pair has found support around the 200 SMA but remains below the 20 SMA, while technical indicators have entered negative territory, the Momentum heading south and the RSI flat at around 47. The downward pressure could ease on a recovery above 108.70, which will depend on how government bond yields develop from now on.”