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Markets vigorously responded to the speech of Fed Chairman Jerome Powell in the US Congress, regarding the tone of his speech as dovish. Powell confirmed the main concerns of investors, hinting that the US economy is approaching a recession and the Fed is aware of the need to respond to the deteriorating economic prospects.
Of course, Powell focused on minor details - trade wars and the decrease in global demand, as if finding a theoretical basis for justifying the reversal of Fed's policy outside of the US economy. But the statistics can not be deceived - the yield spread between long-term 10-year treasures and short-term leaves in a negative area, which always with some delay preceded the recession.
Market expected that the Fed will lower the rate by a quarter point at the meeting of July 30-31. This means that Friday's pretty confident report on the labor market can no longer be taken into account.
A little later, the minutes were published for the June Fed meeting, which exactly confirmed the main thesis of Powell's speech; and therefore, did not cause a noticeable reaction of the markets. 7 out of the 17 FOMC members are in favor of two declines in the current year, one for one decline, and the opinion was expressed that the risks would increase if the indicated negative trends developed. Powell, before Congress, confirmed that the risks are indeed increasing, so the trend towards an even softer position of the Fed remains. This, in turn, forms the confidence of the market that the rate will be lowered in July.
The dollar has fallen sharply, but a number of factors indicate that the weakness of the dollar is unlikely to grow into a trend. Gold futures did not come close to the highs of June-July, oil growth is easily explained by a significant reduction in oil reserves according to EIA. In the foreign exchange market, the weakening of the dollar did not go beyond the corrective pullbacks. Apparently, the expected reduction in the Fed rate in July will only lead to the fact that the other large Central Banks will catch this wave and take measures to weaken their own currencies.
Today, Powell will continue his speech in Congress. In addition, data on inflation in June and the Treasury report on the state of the budget will be published. The dollar may roll back a little lower, but this pullback will be an excellent opportunity for purchasing.
USD/CAD
The Bank of Canada left the target rate of 1.75% at a meeting on Wednesday. In an accompanying commentary, BoC noted that ongoing trade tensions have a significant impact on global economic prospects.
The Canadian economy is extremely dependent on the state of the US economy, so BoC regards the likelihood of growing trade conflicts as the biggest threat to the country's economy. At the same time, GDP growth in Q2 is expected to be slightly above forecasts. The consumption is high, so the Bank saw no reason to lower the rate on July 10.
The next meeting will be held on September 4, and a full update of forecasts on the economy - at the end of October. Thus, the loonie will most likely look more confident than other currencies, since the threat of lowering the rates has been postponed to the end of the year. Also loonie, as a commodity currency, is supported by the growth of oil prices and the reluctance of stock indices to fall. Therefore, in a pair with the dollar, the Canadian is still a favorite. The test of support 1.3036 is quite likely, but it is not necessary to count on a strong movement. Most likely, trading is still in the range with a slight tendency to decrease.
USD/JPY
The main macroeconomic indicators of the Japanese economy continue to deteriorate. Orders for engineering products in May fell by 7.8%, real average wages are falling, the price index for corporate goods fell by 0.5%, which is far below forecasts, and the direction of cash flows indicates the withdrawal of funds from the country's economy.
The Cabinet of Ministers of Japan has published another summary of the economic forecasts of Eco Watchers, confirming the negative trend - indices are at minimum levels for almost three years.
All these factors are against the strengthening of the yen, but in the short run, the opposite is true - the weakness of the dollar and the threat of market collapse contributed to the growth in demand for the yen. USD/JPY has every chance before the end of the week to test the level of 107.5 and continue to support 106.76.
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