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The Aussie slumps below 0.74 on the back of Fed Chair Powells Testimony

By OFX

US Dollar strength was again the main narrative that drove the Aussies fortunes in overnight trading. Back below the key support of 0.74, the Australian Dollar changes hands this morning at 0.7384. It wasn’t an entirely negative day for the Aussie however, which saw early gains to the 0.7440 level during the Asian session.

The catalyst for the swift reversal of direction was Federal Reserve Chair Powell who was decidedly hawkish in his semi-annual testimony to the Senate. Of note was Chair Powell’s stated intention to continue with the gradual rate rise path “for now”. Against the backdrop of geopolitical tensions and trade disputes the market appreciated the positive take on the health of the US economy and immediately responded. The Greenback surged against its counterparts and saw the Aussie forced lower. The Australia Dollar now treads water at 0.7385, a key support level.

Looking forward, the Aussie has little to digest on the domestic economic calendar and will again turn offshore for direction. Of particular interest to the Pair is a number of data releases in the US as well as another testimony from Fed Chair Powell. The British also release their important inflation figures later in the evening.

The New Zealand Dollar saw modest moves over the past twenty-four hours despite squaring off positions this morning from yesterday’s open of 0.6775 against the US Dollar.

There was little reaction to the latest release of NZ Inflation figures for the quarter which came in at 0.4% and just below forecast while the annualised inflation reading dipped to 1.5%. The Kiwi saw little movements despite a quick dip lower on the initial release to 0.6760 before rebounding back as housing pricing saw a 0.9% rise and the main driver of the quarterly reading.

The afternoon was eventful after seeing the Kiwi bolt through the 0.68 handle to an intraday high of 0.6840 following the release in the afternoon of the RBNZ sectoral factor model – a measure of inflation showing an actual rise of inflation for the June quarter of 1.7% and the fastest pace since 2011.

Broad US Dollar strength and another weak GlobalDairyTrade auction pulled the New Zealand Dollar lower as global dairy prices dropped for the fourth time in a row in auctions early this morning with the index showing a negative reading of 1.7%.

The New Zealand Dollar opens this morning at 0.6780

The Great British Pound lost over 1% yesterday against the Greenback falling from levels of 1.3269 down to 1.3069 before gapping up to 1.3150 on the back of reports Tory rebels were being threatened with a general election if they defeat the government of a new clause. However, the government has managed to narrowly avoid a defeat on the amendment to the Trade Bill. This clause would have required the UK Government to make it a negotiating objective to establish a free trade area for goods with the EU or otherwise to enable the UK's participation in a customs union with the EU.

Data was pretty much shrugged off as UK politics took centre stage, UK wage growth slid to its lowest rate in six months, despite record numbers of people in work across the country. Average Hourly Earnings rose by 2.5% on the year in three months to May. The data mounts pressure on the Bank of England to hold off on raising rates as early as August. The disappointing figures for pay growth came despite unemployment remaining at 4.2%, which was the joint lowest level since May 1975.

Looking ahead, economic data today we see the release of UK inflation report. Britain’s Consumer Price Index has been falling of late, contributing to the decision not to raise rates in May. Annual headline CPI fell to 2.4% in May and is now projected to rise to 2.6%. Core CPI is expected to remain stable at 2.1%. The Retail Price Index (RPI) which is also eyed, carries expectations for an increase from 3.3% to 3.5% y/y. Contrary to the US, headline CPI tends to have the most significant impact. We also see the CB Leading Index which is the Conference Board’s composite indicator, it showed a monthly drop of 0.2% last time, causing some worries. We could see a recovery now.

First line of support at 1.3100 followed by 1.3049, on the upside, resistance at 1.3155 and 1.3200

The US dollar advanced across the board on Tuesday recouping losses suffered through last weeks close and Monday’s open. Recent trade tensions have heightened concerns the FOMC and Federal reserve may be forced to temper the pace of monetary policy tightening but comments from newly appointed Fed President Jerome Powell helped moderate the growing disquiet.

Powell’s senate address hit on a continued expectation for US Growth and a stronger economy while downplaying the expected effect of recent trade hostilities on Fed plans for monetary policy. Largely dismissing suggestions the trade war will dent domestic growth Powell has left the door open for a possible 2 additional rate hikes this year driving the dollar to highs just below the 12 month peak. Adding further support behind the already strengthening dollar Powell’s testimony adds further impetus for ongoing USD upside. However, the ongoing trade dispute will continue to weigh on investors conscious and likely temper aggressive upside moves, at least into late August when the newly announced 10% tariffs on 200bn in Chinese exports are introduced.

Attentions today turn to Powell’s House of Representative address while crude oil inventories and building starts dominate the macroeconomic docket.

The Euro closed the session 0.40% down versus the USD, just above the support level of 1.1660. The common currency was able to temporarily break the 1.17 resistance level, reaching a new weekly high at 1.1740 but then markets turned their attention to FED Chairman Testimony at the Senate.

Jerome Powell delivered an upbeat assessment of the US economy, signalling that gradual rate rises are the best way “for now” given the “encouraging” inflation numbers. USD dollar rallied following a spike in US 2YR yields and EURUSD dropped to a new weekly low of 1.1648, from where it rebounded to close at 1.1661.

From a technical perspective, the current 1.1660 could provide initial support, with further demand around 1.16 while the 55-day moving average should provide resistance around 1.1729

The loonie couldn’t hold the gains that saw the USDCAD trading to a new weekly low of 1.3113 and closed the session down 0.50% versus the USD, at 1.3196.

USD broad strength following the upbeat economic message from FED Chairman Jerome Powell to the Senate weighted on the loonie despite a very strong Canadian Manufacturing sales number of +1.4% (versus +0.4 % expected). USDCAD broke temporarily above the 1.32 resistance level, reaching a new weekly high of 1.3217 before settling back below 1.32.

Short-term support/resistance levels for USDCAD sit now at 1.3120 and 1.3220 respectively.