Analysts at Goldman Sachs see only 15% probability of the US Federal Reserve cutting rates by 50 basis points on July 31. The investment bank, however, puts the probability of a 25 basis point rate cut at 75%.

Further, it expects the Fed to deliver one more rate cut in September.

The market pricing is now implying around 30 basis points of easing on 31 July.

Fed's Chair Powell, during his testimony to the House Financial Services Committee on Wednesday, said “many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened.”

Markets seems to have taken Jerome Powell’s testimony as a signal that the Federal Reserve is fully on board for rate cuts. This is evident from the six basis point drop in the US 2-year treasury yield.

  • Risk tone remains heavy as headlines concerning Iran/trade are on the rounds.
  • The odds favoring the need for easy monetary policy are getting stronger after the Fed Chair’s Testimony.

Not only the US-China trade tension and rumors of the US air strikes in Syria but news that Iranian boats attempted the British tanker seize also strengthened the markets’ risk-off momentum. With this, GBP/JPY declines to the lowest since July 03 as it trades near 135.35 during early Thursday.

The US and China seem at loggerheads despite recent truce as media releases from both the nations keep raising doubts over the US President Donald Trump’s upbeat statements at the end of G20 that previously triggered broad risk-on.

Adding to the woes was the US Federal Reserve Chairman Jerome Powell’s Testimony that rubberstamped 25 basis points (bps) of a rate cut in their next meeting and cited a downside risk for inflation.

As if aforementioned catalysts weren’t enough to challenge risk-averse traders, rumors of the US readying airstrikes over some part of the Iranian targets in Syria, coupled with the CNN news indicating Iranian boats’ attempt to seize the British oil tanker, added further strength into the safe-havens like Japanese Yen (JPY). Macro risk barometer, the US 10-year treasury yield trims nearly 2 bps to 2.042% by the press time.

Given the lack of major data, investors can keep concentrating on the trade/political headlines to determine the near-term market direction.

Technical Analysis

With the 14-day relative strength index (RSI) trading near oversold territory, the price might attempt a recovery towards recent high surrounding 136.30 ahead of questioning the monthly top near 137.80, if not then late-September 2016 high around 132.50 and the year 2019 low at 131.79 can please the bears.

  • 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."

  • EUR/USD is chipping away at key resistance at 1.1265.
  • The 4-hour chart shows a falling wedge breakout.

The American Dollar remains on the defensive in Asia as expectations of a July rate cut have firmed, courtesy of dovish testimony by the US Federal Reserve Chairman Powell. The market is now pricing around 30 basis points of easing on 31 July.

The US Dollar weakness has pushed EUR/USD higher to 1.1265. That level marks the confluence of the 4-hour chart 200- and 50-candle moving averages and also the trendline connecting May 30 and June 18 low.

A convincing break higher would add credence to the falling wedge breakout, a bullish reversal pattern, on the 4-hour chart and open the doors to levels above 1.13.

The bulls, however, may have a tough time forcing a convincing break above 1.1265, as the 4-hour chart 50- and 200-dandle MAs are about to produce a bearish crossover.

As of writing, EUR/USD is trading at 1.1264.

4-hour chart

Trend: Bullish above 1.1265

Pivot points

  • 8-week long descending trend-line, 100-day EMA limit the USD/IDR pair’s immediate upside.
  • A downside break of 14,062/59 can fetch prices to a confluence of the April low, 23.6% Fibonacci retracement.

Despite bouncing off late-April lows, the USD/IDR pair couldn’t cross 100-day exponential moving average (EMA) as it takes the rounds to 14,100 during early Thursday.

As a result, chances of the pair’s another decline to 14,062/59 region comprising lows marked on April 24 and July 10 seem brighter.

It should also be noted that extended downturn past-14,059 might not hesitate to drag the quote beneath 14,000 round-figure towards 13,975/75 support-zone that also encompasses 23.6% Fibonacci retracement of April-June downpour and April month low.

Meanwhile, 100-day EMA level of 14,241 and a downward sloping trend-line since mid-May, at 14,251, can limit the pair’s near-term advances.

In a case where the prices rally past-14,251, 61.8% Fibonacci retracement near 14,346 could gain buyers’ attention.

USDIDR daily chart

Trend: Sideways

Forex today was seeing a retake of shorts in the Dollar following Federal Reserve Chairman Powell's first day of his two-day testimony to Congress. Powell was advocating for a rate cut which weighed on both the greenback and US yields. He argued that the jobs report has done little to change the Fed's outlook and that was essentially taken by the market as a rubber stamp for at least a 25pb cut this month as investors get set of r the U.S. Consumer Price Index due today in New York's session. The FOMC Minutes did not give anything new to trade from.

"First, he restated the FOMC’s view from the June meeting that the Fed would ‘act as appropriate to sustain the expansion’, and that ‘the case for a somewhat more accommodative monetary policy had strengthened’ for ‘many’ FOMC members. He added that ‘since then (…) 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’.

As well as reiterating that ‘inflation pressures remain muted’, meanwhile, he gave this a further dovish twist by saying ‘there is a risk that weak inflation will be even more persistent than we currently anticipate’. "

Analysts at ABN Amro explained.

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.

In other news, the Bank of Canada, as widely as expected, the bank held steady at 1.75% as fully expected but sounded slightly less upbeat on growth where the bank focused on the impact of protectionist trade measures.

Currency action

  • EUR/USD climbed from 1.1215 to 1.1260, ending the day at 1.1250.
  • USD/CAD was subject to bears selling on the BoC decision and optimism, while offered by the Powell outcome, dropping half a Loonie to 1.3080.
  • USD/JPY dropped from 108.95 to 108.35 and was also weighed by ongoing uncertainties on the geopolitical front.
  • AUD/USD rallied despite the dovish RBA sentiment, finding relief on the dovish Fed rhetoric. The pair travelled between 0.6920 to 0.6960.
  • NZD/USD similarly rallied and it dod so from 0.6595 to a high of 0.6657.

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.

Key notes from Wall Street

  • Wall Street ends in the green on a dovish Fed backdrop

Key events coming up

Analysts at Westpac noted forthcoming events for Asia:

  • Australia’s housing market remains a hot topic but there should be limited interest in May housing finance approvals (11:30am Syd/9:30am Sing/HK), given that the month includes a surprise federal election result where tax breaks on investment housing were proposed and of course pre-dates two RBA rate cuts. Given soft industry data, Westpac looks for -1.5%mth; the median forecast is -1%.

  • In the NY morning, RBA deputy governor Debelle speaks via video conference at the FX Week USA conference.