Dollar follows yields lower ahead of European markets open

The dollar is continuing to hold weaker in the aftermath of Fed chair Powell’s testimony since overnight trading


It’s a beat down of the dollar to start the new day as traders are still digesting the added dovish tones from Fed chair Powell’s testimony overnight. Powell expressed dovish tones with regards to the economic and inflation outlook, while also brushing aside last week’s jobs report by claiming that there is no evidence to call current labour market conditions “hot”.

He also made a mention that current wage pressures aren’t enough to spur any upside in inflation and that there is a risk that inflation will be much weaker than what the Fed anticipates it will be. That leaves the door open for more aggressive rate cuts down the road, judging by his tone that is.

With a 25 bps all but secured, we’re pretty much back to where we started before the release of last Friday’s jobs report. As such, this is going to make for some really choppy trading in the dollar over the next few weeks with trade headlines and economic data the main items that will swing sentiment in the greenback before the FOMC meeting.

For now, the dollar is following Treasury yields lower as markets are still viewing a slightly more dovish Fed from Powell’s remarks yesterday. 10-year yields are down by 2.3 bps on the day to 2.039%, giving added impetus to the yen ahead of European trading.

That said, unless yields threaten to fall off dramatically – which there isn’t much reason to – then the backlash in the dollar may not be too prolonged in my view. After all, this just puts us back to before Friday’s jobs report with Powell just reaffirming a 25 bps rate cut but opening the door for the Fed to ease more or pause if need be.

We’ll have to wait on trade headlines and more economic data for further clues from hereon.

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