USD/CHF consolidates losses below 0.8130 in risk-on markets with Fed's Powell in the spotlight
- The US Dollar accelerated its reversal from last week's highs to levels near 0.8100 after the Iran-Israel ceasefire.
- Dovish comments from Fed officials Bopwman and Waller have added pressure on the USD.
Fed Chair Powell is expected to speak to Congress later today and give more clues on the bank's next steps.
The Swiss Franc has retraced most of the last two weeks’ losses, and the USD/CHF has returned to levels right above 0.8100, with the Dollar weighed by the risk-on mood after the announcement of a truce in the Middle East, and dovish rhetoric by Fed officials.
Trump boosted investors’ sentiment late on Monday, downplaying Iran’s attack on a US military base in Qatar and announcing a “complete and total” ceasefire. The ensuing risk rally has hit the US Dollar harder than the CHF, another safe haven, which is also struggling today.
Also on Monday, Federal Reserve Vice Chair of Supervision, Michelle Bowman, joined her colleague Waller and called for a rate cut in the coming months. Bowman affirmed that the impact of Trump’s tariffs on inflation is likely to be smaller than previously thought, and that the bank should ease its monetary policy to support job creation.
These comments have boosted the interest in Chairman Powell’s testimony to Congress. Investors will be looking for signs of cracks in his recent hawkish rhetoric, which would boost hopes of a rate cut, probably more in September than in July, and increase pressure on the US Dollar.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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