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Fed Chair Powell Back on Capitol Hill before the Fed Beige Book is Released at 2pm

By OFX

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 Federal Reserve Chairman 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. Mainly dismissing suggestions the trade war will dent domestic growth Powell has left the door open for a possible two additional rate hikes this year driving the dollar to highs just below the 12-month peak. Powell's comments were viewed as hawkish for the US economy, and the greenback found further footing against its G10 counterparts. However, the current 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.

The loonie could not 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 to close the NA session.

The Canadian economic calendar is light today. At 10:30 we will see the report on the US Energy Information Association's crude oil stockpiles which are expected at -3.5 million. Gold has fallen 0.18% to 1225.00 a troy ounce, while copper has also fallen 0.30% to 2.73 a pound.

Short-term support/resistance levels for USDCAD sit now at 1.3157 and 1.3245 respectively.

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, signaling 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 pound lost over 1% against the greenback yesterday falling from levels of 1.3269 and down under 1.31 on the back of significant Brexit concerns. At one stage it was looking like PM May could face being ousted if she failed to win a key trade bill amendment, this being the primary driver of GBP’s weakness through the day. Pro-EU MPs wanted the UK to join a customs union if it fails to agree with a free-trade deal with the EUR. The PM, who argues that such a deal would prevent the UK from striking new trade deals with other countries, won the vote by a six-vote margin. However, the damage to the pound had seemingly been done, and GBP/USD has continued to hug the 1.31 level over the last few hours. BoE Governor Carney’s comments yesterday morning probably didn’t help the situation. He said that “it would be a material event for interest rates if Britain leaves the European Union next year without a deal to smooth its departure. Our job is to make sure we are as prepared as possible.”

The pound fell after CPI inflationary figures missed expectations slightly across all readings, the pound has regained some of its losses to start the NA session. Theresa May faced questions from Tory MPs over Brexit at the Liaison Committee of select committee chairs, so further sterling volatility is a risk.

US Dollar strength was again the main narrative that drove the Aussie's 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 currency pair is a number of data releases in the US as well as another testimony from Fed Chair Powell. The British also release their essential 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 annualized 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 primary driver of the quarterly reading.

Overnight the Kiwi bolted through the 0.68 handle to an intraday high of 0.6840 following the release 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 Global Dairy Trade 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 contrary reading of 1.7%. The New Zealand Dollar opens this morning at 0.6780.