Australian dollar holds firm as USA inflation surprises to upside

The Federal Reserve has signaled it will cut interest rates at its July 30-31 meeting, with chair Jay Powell telling Congress on Wednesday that there is a "risk that weak inflation will be even more persistent than we now anticipate".

Powell's statement emphasizing that current trade conditions and muted economic activity are dampening the USA economy's outlook had a sanguine effect on the market.

Investors expect the Fed will cut its benchmark rate, now in a range between 2.25% and 2.5%, by a quarter percentage point at its 30-31 July meeting.

Records from latest meeting of Fed policymakers showed heightening fears that a US-China trade war was posing a serious risk of ending the economic expansion by pushing growth and inflation lower.

Federal Reserve Chair Jerome Powell testifies before the US Congress on Wednesday and Thursday and investors have a lot riding on him sounding suitably dovish. The surge helped the Aussie move away from a 2-1/2-week trough of $0.6910.

The Dow and S&P 500 rose on Thursday to close at record highs as health insurers gained after the Trump administration scrapped a plan created to rein in prescription drug prices, while financial shares climbed with bond yields.

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In his first day of testimony before Congress on Wednesday, Powell confirmed that the United States economy was still under threat from disappointing factory activity, tame inflation and a simmering trade war. "Hence, while we see a slight firming of core inflation trends in June, a meaningful upside surprise would likely be required for the Fed to change its tune".

A study conducted by LPL Financial Research revealed that steep rate cuts generally occur around recessions. A 25-basis point cut remains fully priced. "Powell's most important concerns are cross currents of trade policy and slowing global growth while persistent low inflation is another factor".

The Fed open the door last month to cutting the benchmark lending rate, and economists and investors are convinced it will happen at the end of July.

Keeping investors on edge was Beijing's threat to impose sanctions on USA firms that sell arms to Taiwan after Washington approved possible sales of $2.2 billion in tanks, missiles and related equipment.

On the trade front, President Donald Trump earlier tweeted that China is "letting us down in that they have not been buying the agricultural products from our great farmers that they said they would". The Labor Department's report on underlying US producer prices at 8:30 a.m. ET is expected to show producer price index final demand remained flat in June, compared with a 0.1% gain in May. The Nasdaq also closed highs at 8,202.53 after Amazon climbed 1.5% to reach above $2,000 per share. The S&P 1500 airlines index rose 0.39%.

MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.2 percent, after 3 sessions of losses.

  • Darren Santiago