The Dollar firmed on Wednesday but remained close to a three-week low due to the cautious remarks from Federal Reserve Chair Jerome Powell, which maintained a restrained risk sentiment.

During his initial day of testimony to Congress, the Fed Chair said a rate reduction wouldn’t be appropriate until the central bank has “greater confidence” that inflation is moving towards the 2% target, setting the context for Thursday's release of the June CPI report.

However, Powell made reference to the cooling job market in the US: “We now face two-sided risks” and can’t focus just on inflation, he stated.

There was little change for the Dollar index, measuring the currency against six peers, at the time of writing at 105.09, after gaining around 0.1% on Tuesday. 

The index had fallen to the lowest since 13th June on Monday on surprisingly weak US payrolls data, Reuters reports.

According to the CME FedWatch tool, traders now estimate a 73% chance of a rate cut by September, down from 76% the previous day. A second rate reduction is largely expected by December.  

“Powell was careful not to pre-commit to a path they could still readily be knocked away from by the data flow,” stated Taylor Nugent, senior markets economist at National Australia Bank.

“Even as markets look to September as the likely kick-off date, it is difficult for pricing to firm much further with three CPI prints and two payrolls to get through, which could readily delay things.”

Powell is scheduled to speak to the House later on Wednesday.

Elsewhere, in New Zealand the Kiwi lost 0.51% at $0.60940, moving away from Monday’s three-week top of $0.6171, after the Reserve Bank of New Zealand’s indication that it might consider rate cuts if inflation slows as anticipated.

The central bank held rates steady as forecast on Wednesday but expressed confidence that inflation would return to within its target range this year.

“There was a signal of greater confidence that inflation will return to target this year,” according to Kyle Rodda, senior financial market analyst at Capital.com.

“That's a revelation and sets the stage for a rate cut before the end of 2024. The markets were already implying it, but this dovish shift suggests it could come sooner than previously thought.”