• Jerome Powell’s testimony in the US Congress will be a top-tier market-moving event this week.
  • New clues on the Federal Reserve interest rate path are awaited.
  • US Dollar, stock markets, and other asset classes could see big swings with the Fed Chair’s words. 

Jerome Powell, Chairman of the US Federal Reserve (Fed), will deliver the Semi-Annual Monetary Policy Report and testify before the Senate Banking Committee on Tuesday. The hearing, entitled “The Semi-Annual Monetary Policy Report to the Congress,” will start at 14:00 GMT, and it will have the full attention of all financial market players. 

Jerome Powell is expected to address the main takeaways of the Fed’s Semi-Annual Federal Reserve Monetary Policy Report, published last Friday. In that report, the Fed noted that they have seen modest further progress on inflation this year but added that they still need greater confidence before moving to rate cuts. “Labor supply and demand resembles period right before the pandemic, when the labor market was relatively tight but not overheated,” the publication read.

US representatives are expected to ask Powell about the interest rate path, inflation developments, and the economic growth outlook in a long Q&A session. However, they could focus on politics because of the upcoming November Presidential election, making it difficult for Powell to respond to questions.

The CME Group FedWatch Tool shows that markets price in only 25% probability that the Fed will leave the policy rate unchanged in September. The latest jobs report showed that US Nonfarm Payrolls (NFP) rose 206,000 in June. This reading came in above the market expectation of 190,000, but the US Bureau of Labor Statistics (BLS) announced that May’s NFP increase was revised down to 218,000 from 272,000. Additionally, the Unemployment Rate edged higher to 4.1% from 4%, while the annual wage inflation, as measured by the change in the Average Hourly Earnings, declined to 3.9% on a yearly basis from 4.1%.

In case Powell adopts an optimistic tone about the inflation outlook and acknowledges loosening conditions in the labor market, investors could remain optimistic about a September rate cut. The market positioning suggests that there is some room for further US Dollar (USD) weakness in this scenario. On the other hand, market participants could reassess the probability of a rate reduction in September and help the USD hold its ground if Powell downplays the gloomy labor market figures and remains cautious about the continuation of disinflation. 

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