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Euro rises from 2-week lows before Powell's testimony

London

THE euro rose above US$1.12 on Wednesday, bouncing off two-week lows as dwindling bets on aggressive US rate cuts buoyed the US dollar, but stayed within tight ranges before Fed chair Jerome Powell testified before the US Congress.

US Treasury yields have risen to three-week highs and the US dollar is up more than one per cent this month after jobs data led money markets to pare back expectations for rate cuts at the Federal Reserve's July meeting.

Mr Powell's semi-annual testimony could either confirm those views or encourage money markets to scale back their rate cut views even further.

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Analysts said the US dollar should benefit if Mr Powell's comments on the US economy are perceived as neutral or hawkish, which would support the argument that rates won't be cut much.

"Coming off the back of a stronger-than-expected jobs report, Chairman Powell is unlikely to paint as grim a picture as what is currently priced into the financial markets," said Derek Halpenny, currency strategist at MUFG.

"So the risk today is towards US rates moving a little higher and the US dollar strengthening modestly further in response." The euro was last up 0.1 per cent at US$1.1222, while an index tracking the US dollar against six other major currencies was at 97.415. On Tuesday, it had reached 97.588 on Tuesday, the highest since June 19.

Mr Powell's written testimony will be released at 1230 GMT. He will deliver it at 1400 GMT with questions afterwards. Minutes from the latest Fed meeting are released at 1800 GMT.

Expectations for a 50-basis-point rate cut this month have evaporated, but investors still expect a 25 bps cut. Another cut is expected later this year because of weak inflation and the fallout from the US-China trade war.

Yields on 10-year US Treasury yields edged up to 2.11 per cent, breaking a two-month falling streak and supporting the US dollar.

However, the most recent US dollar moves were not enough to distract investors from the fact that the world's biggest central banks are likely to ease monetary policy. The euro has traded between US$1.11 and US$1.14 since February.

"What you're most stuck with is range trading," said Sebastien Galy, senior macro strategist at Nordea Asset Management.

The foreign exchange market is currently dominated by money flowing from corporate and hedging activity, Mr Galy said. In the UK, sterling was close to US$1.2439, the lowest it's been since April 2017, not considering the "flash crash" on Jan 3. REUTERS