The US currency stood a step away from updating three-week highs, but fell on a broad front against the background of statements by the head of the US Federal Reserve System (FRS) Jerome Powell, who strengthened market participants regarding the opinion that the US Central Bank will reduce the interest rate for the first time in 11 years.
Yesterday, the Fed Chairman presented a semi-annual monetary policy report to the Financial Services Committee of the US House of Representatives.
"The development of some major foreign economies seems to have slowed, and this weakness could have an impact on the US economy. In addition, a number of issues still require resolution, including the situation in international trade, with a US government debt ceiling and Brexit. There is also a risk that weak inflation in the United States will turn out to be even more stable than we now expect, "said J. Powell.
He also noted that a strong report on the US labor market for June did not change the Fed's plans. The Central Bank is still ready to take the necessary measures to support economic growth in the country.
The market took the words of the Fed chairman as a very transparent hint that the regulator will reduce the interest rate in the near future.
The minutes of the June meeting of the FOMC, published the day before, became an additional reason for expectations about the rate cut at the end of July.
The discussion of Fed members at the June meeting on the prospects for monetary policy showed a clear bias towards the need to cut rates in the near future. Committee members argued in favor of such a decision a wide range of arguments - from trade relations to inflation and the labor market.
The risk assessment of the Fed's own forecasts, also known as "points," showed an increase in the number of Fed representatives, which suggest a reduction in GDP growth rates and a decrease in inflation, as well as an increase in unemployment in the country.
Many FOMC members considered monetary policy easing necessary in the short term while maintaining downside risks for the US economy.
"The cut in July is now beyond any doubt," says James McCann of Aberdeen Standard Investments.
The main thing that traders and strategists are now interested in is the scale of the rate reduction.
Speaking yesterday in Congress, J. Powell did not give a direct answer to the question of whether it would be possible to reduce the rate in the United States by 0.5% at once at the July meeting.
"At our meeting, which will take place in three weeks, we will evaluate a wide range of data," he said.
"If the economy really slows down and you face shocks that can knock you down, a drop of a quarter percentage point will not suffice. Apparently, the Fed is switching from statistical data dependence to risk management, "says Seth Carpenter, chief economist at UBS Securities Inc.
"How aggressively will the Fed behave? I think that they will go down by one baseline by 25 basis points in July, and then they will move at the speed of the glacier, "said Chad Morganlander of Washington Crossing Advisors.
"The market expects that this month the rate will be reduced, because the Fed, in fact, said so. However, in order to think that a large series of declines will occur after this, you need to believe in a serious economic downturn in the United States, and there is no clarity on this, especially after strong June data on the American labor market, "said Societe Generale strategist Keith Jukes.
According to Erin Brown of Pacific Investment Management Co., the fate of the dollar will depend on whether the expected Fed rate cut this month will be a one-time step or the beginning of a cycle.
"It is really important whether this will be a drop in insurance rate or a consistent downward move. If the latter proves to be protracted, I think that the slope of the yield curve of treasuries will increase quite significantly from current levels and the greenback may really start to sag, "she said.
"The speech of J. Powell opened the door for further dollar decline, given that the Fed chairman did not dispel expectations regarding the easing of the monetary rate," says BNP Paribas.
Meanwhile, State Street Bank & Trust believes that the dollar can go up even after the Fed, having justified market expectations, will lower the rate at the end of July, since investors can take profit taking on short positions in US currency.
"We share the opinion that with almost a 100 percent probability on July 31 following the FOMC meeting, the federal funds rate will be reduced by 0.25%. However, after this, the Fed will prefer to postpone, study statistics, inflationary trends, the state of the real estate market, and assess the impact of a trade war. And only after will make any decisions. Thus, after July, the American Central Bank is likely to take a neutral position, "the experts noted.
"Even if the Fed becomes less optimistic about the economic outlook, the demand for the dollar will grow as an asset in a safe haven," they added.
