UPCOMING EVENTS:
Tuesday: US PMIs.
Thursday: Jackson Hole Symposium (25-27 August).
Friday: Fed Chair Powell speaks and US PCE.
Last week the USD came back with a vengeance. The market completely reversed the USD losses out of the CPI report and increased momentum as bad Chinese data reaffirmed the bleak global economic outlook for the next 6/12 months, which ultimately benefit the US Dollar as a safe haven. Fed members also reaffirmed their commitment in fighting inflation and the desire to front-load rate hikes to the 3.50%-4.00% range by year end with a 50 or 75 bps hike coming in September. I think the USD still has a lot of room to run with the EUR/USD chart in particular giving quite a high conviction of a break of the July 14th low at 0.9952. US Dollar strength of course will be seen in the other major pairs since they have USD on one side of the pair, but EUR, GBP and AUD likely to lead the losses against the USD.
On Tuesday we get Prelim PMIs from the S&P Global for Eurozone, UK and US. They are all expected to contract further as high inflation, tighter monetary conditions and synchronised global slowdown weight on economic activity. US PMIs will have a greater significance for the market and bad data should be taken as positive for the USD as its safe haven status coupled with rising interest rates should add to the gains. We may also see a spike against USD due to the narrative that the Fed will pivot soon as economic conditions worsen fast, but that should be just a fade opportunity.
On Thursday starts the Fed’s annual economic policy symposium at Jackson Hole and it will run for three days until Saturday. This event is often used to signal policy changes. In fact, back in 2020, Fed Chair Powell announced a revision to the Fed’s monetary policy framework by reframing the 2% annual inflation goal as an average inflation target (AIT) of 2% over the long-run to compensate for the years they missed their target. They’ve done this to increase market inflation expectations and signal a great commitment to keep monetary policy loose for longer. This is one of the reasons they let inflation to overshoot their target even though it led to too much inflation as they acted too late.
The market focus will be on Fed Chair Powell expected to speak on Friday at 15:00BST/10:00EDT. As of now we know that the Fed wants to front-load hikes and reach a 3.50%-4.00% rate by year-end as most Fed officials signalled with their comments up to now. The market also misinterpreted or just cheered too much when Powell signalled that he thinks they reached the neutral rate and from now on they will be data-dependent and it will likely be appropriate to slow the pace of rate increases to assess their effects on inflation and the economy. They also see a risk of overtightening and market conditions becoming too lose forcing them to take stronger actions. We heard from other Fed members these past weeks about a 50 or 75 bps hike coming in September with the market pricing a higher chance of a 50 bps. If the Fed wants to let the market know that it shouldn’t fight them, they could go for an out of consensus hike, which in this case would be a 75 bps.
Finally, on Friday we will see the latest US PCE report. The Core PCE M/M is expected to slow to 0.3% from the prior 0.6%. The Fed’s preferred measure of inflation, the Core PCE Y/Y, will also be of focus keeping in mind that the last time it increased to 4.80%. The expectation is for a decline to 4.70%.
This article was written by Giuseppe Dellamotta.
