The US dollar ignored inflation data, focusing entirely on Fed Chairman Jerome Powell's speech, who spoke in Congress during the US session on Wednesday.
In general, Powell's statement was in favor of the US currency. The head of the Fed repeated his main points that he had already voiced following a recent meeting of the central bank. At the same time, he outlined in more detail the prospects for the monetary policy of the Federal Reserve. The essence of his rhetoric boiled down to the fact that the regulator pauses the issue of lowering the interest rate. Contrary to the fears of some investors regarding further steps in this direction at the beginning of 2020, Powell assured Congressmen that he would not adjust interest rates "in the near future". He clarified that the measures taken by the Fed, as a rule, act belatedly - which means that the effect of three rounds of easing monetary policy will be felt in full only with time.
It is difficult to say what kind of timeframes we are talking about. According to some experts, the US regulator will take a wait-and-see attitude at least until the spring of next year, evaluating during this time the dynamics of GDP growth, inflation, the labor market and industrial production. According to other analysts, the Fed will take a longer pause - until the end of 2020 or the beginning of 2021 (especially considering the presidential election in the United States in November next year). Here it must be emphasized that the "pause" in this context concerns not only the issue of reducing the rate - but also raising it. Powell reiterated his thesis that inflation should demonstrate "substantial and sustainable growth" before the regulator only thinks about tightening monetary policy.
The head of the Fed also outlined the conditions under which the regulator decides to further reduce the rate. Among the main risks, Powell noted the weakening global economic growth and the ongoing trade conflict. He quite veiledly pointed out the relationship of the trade war with the prospects of monetary policy, but at the same time the hint sounded very transparent. According to him, the Fed will "appropriately" react to those events that provoke "a significant reassessment of our worldview". In other words, if the United States and China decide to intensify the trade conflict, the issue of rate cuts will again be on the agenda: with a high degree of probability, the regulator will mitigate the monetary policy for preventive purposes.
Speaking at the Economic Club in New York yesterday, Donald Trump in his usual manner voiced conflicting comments on the prospects for relations between Washington and Beijing. On the one hand, he threatened China with new duties if the parties do not sign the deal. On the other hand, he assured those present that the countries were "very close to achieving it." At the same time, Trump said that he would agree to a deal only if it would be beneficial for the United States. Contrary to expectations, the US president did not talk about a new likely place for signing the agreement. This suggests that the negotiation process is still in full swing, and is far from the final stage. Although last week, rumors circulated in the press that US and China leaders would meet in London in early December. Now this question has again hung in the air.
Thus, Powell's fears are well founded, given the counterclaims of the Chinese (according to rumors, they demanded to abolish the September duties and not introduce December). A possible escalation of the trade war could hit US bull a lot - this is the only factor that can "remove the pause" on the process of lowering rates.
Returning to US inflation, it is worth noting that the figures published today turned out to be quite good, although core inflation did not reach forecast values (in annual terms). Instead of projected growth of up to 2.4%, the core index remained at around 2.3%. In monthly terms, the indicator reached expectations, that is, at around 0.2%. But the general consumer price index pleasantly surprised dollar bulls: in both monthly and annual terms, the indicator came out in the green zone, exceeding forecast values (0.4% MOM and 1.8% YOY). This dynamics is primarily due to the increase in energy tariffs (prices rose by 2.7% in September). In addition, medical services and food prices went up. Commenting on today's release, Powell noted that "inflation is currently moving sideways."
Thus, Jerome Powell provided little support to dollar bulls: the greenback to one degree or another strengthened throughout the market, also against the euro. The Fed will not cut interest rates in the foreseeable future, but on one condition: if the trade conflict is not exacerbated by new barrage duties. This remark kept the dollar from large-scale growth, especially against the background of conflicting statements by unpredictable Trump. As a result of Wednesday, the EUR/USD bears could not even approach the support level of 1.0970 (the lower boundary of the Kumo cloud on the daily chart), which indicates the precarious positions of the US currency.
