This Monday, the dollar rose following statements by Federal Reserve (Fed) Chairman Jerome Powell, who adopted a more hawkish tone on the US economy, leading investors to reduce their bets on a new 50 basis point cut at next Fed meeting. Powell noted that recent revisions to economic growth, savings rates and personal income data removed some of the downside risks that worried the Fed.
Powell also anticipated that he expects two additional rate cuts this year, totaling 50 basis points, as long as the economy performs as expected. However, he warned that it could take several years before inflation in housing services declines to desirable levels.
Forex market reactions
The impact of Powell’s statements was immediately felt in currency markets. The dollar index rose 0.42% to settle at 100.86, while the euro fell 0.34% to $1.1125. The dollar also gained 1.17% against the Japanese yen, trading at 143.85 yen.
The probability of a 50 basis point cut in November fell to 35%, according to CME Group’s FedWatch tool, compared with 37% before Powell’s speech and 53% recorded last Friday. The Fed’s 50 basis point cut on September 18 was described by Powell as a “recalibration” to take into account the significant drop in inflation since last year.
The chances of a 50 basis point cut drop to 35%, according to FedWatch.
Expectations around US jobs data
This week, traders will be keeping an eye on upcoming US economic data, including ISM reports on the manufacturing and non-manufacturing sector, as well as employment data, with a focus on Friday’s nonfarm payrolls report. .
According to Marc Chandler, chief strategist at Bannockburn Global Forex, the week will be focused on employment data. Chandler added that another 50 basis point cut this year is the most likely scenario, unless the jobs report is surprisingly poor, with fewer than 100,000 jobs created and/or an increase in the unemployment rate.
Economists polled by Reuters expect 140,000 jobs to be added in September, with the unemployment rate stable at 4.2%.
In summary
Jerome Powell’s hawkish tone has strengthened the dollar, reducing expectations of large rate cuts by the Fed in the coming months. With a focus on this week’s jobs data, the currency market will continue to react to key economic signals, as the Fed evaluates its monetary policy for the rest of the year.
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