Overnight Headlines

*Fed Chair Powell: Soft landing very challenging, recession possible

*Dollar languishes amid lower US yields as growth fears mount

*Crude oil hit again as slowdown angst rips through commodities

*Asian equity markets mostly higher, China tech stocks lead gains

US equities declined marginally with big underperformance in energy and materials. Recession fears abound as investors digested Powell’s testimony, lower oil prices and a tumble in bond yields. Asian shares have wobbled but eked out small gains in volatile trade. European futures are in the red while US futures are mixed.

USD was subdued following Fed Chair Powell stoking growth fears. DXY was lower by 0.2% and is lingering in the low 104s. EUR traded rangebound with the 50-day SMA above at 1.0607. GBP briefly fell to 1.2161 after UK CPI hit a new 40-year high, before paring its losses. USD/JPY declined this morning with losses exacerbated after a former FX chief spoke against yield curve control. The pair is back on a 135 handle after advancing as high as 136.71 yesterday. The antipodeans are softer amid commodity pressure.

Event Takeaway – Powell and the “r” word

Yesterday saw Fed Chair Powell give his testimony to the US Senate Banking Committee. He underlined the FOMC’s commitment to bringing inflation down at all costs and acknowledged that a recession was “certainly a possibility”. He said there was a clear risk that the quick tightening of monetary policy could tip the US economy. A “soft landing” will be “very challenging”.

This is probably the most outspoken Powell has been in warning that the current unprecedented magnitude of the hiking cycle could end badly. Money markets continue to price in another 75bp rate rise in July followed by a 46% chance of another one in September. It won’t scale back to quarter percentage point moves until November.

Chart of the Day –USD/CAD still elevated

CAD has been the best performing “commodity” currency this month. But it is still down nearly 2.5% versus the greenback. The loonie retains a strong (negative) correlation with US equities so when the S&P500 suffers, so does the CAD. The slump in energy prices has also not helped. That said yesterday’s better-than-expected CPI print at 7.7% in May reaffirmed bets for a 75bp rate hike at the upcoming BoC meeting on 13 July.

Gains in USD/CAD paused again above 1.30 last week. Trend momentum still favours dollar gains. We are currently trading around highs form late last year. Support sits at this week’s low at 1.2905, and then 1.2860. Buyers will want to beat 1.30 and then make another challenge on 1.3076/78.