There appears to be a growing consensus in markets that Fed Chair Powell will double down on his hawkish rhetoric at Jackson Hole later today. Egged on by comments from Boston Fed President Collins, who suggested that further hikes could be needed, more traders began to bet on a hawkish speech, sparking a broad USD rally. While this led the loonie to weaken by -0.4% against the greenback, the Canadian currency nevertheless managed to outperform on every G10 cross. Furthermore, the loonie posted gains of 0.5% or more against NOK, GBP, AUD, NZD, and SEK. Yields were a key driver of this dynamic, with Canadian yields rising by about 5bps across the curve, keeping pace with US yields as the rest of the world lagged behind. Back to Jackson Hole though—we think that the US’s tremendous success in reducing core inflation pressures below 2% is a key reason why Powell could underwhelm today. Another reason is the lack of consensus within the Fed. Philadelphia Fed President Harker said yesterday that, contrary to Collins’s view, he does not see the Fed changing policy rates for the remainder of the year. For these reasons, we see the risks around Powell’s speech as tilted toward loonie strength, i.e. USDCAD downside.
Despite hitting a bit of a bump at the European-US crossover, the dollar managed to hold onto its earlier gains yesterday and maintained a bid throughout the day. Despite a more choppy session for US equities and bonds, the sustained dollar rally highlighted the underlying bias for long dollar exposure heading into today’s Jackson Hole event. However, this wasn’t the case against the Turkish lira after the CBRT raised the repo rate 750 bps to 25%, exceeding even the most hawkish estimates by a considerable margin. In what was a largely benign FX session elsewhere, the move by the CBRT drew a lot of attention, with the decision ultimately leading USDTRY over 5% lower on the day as the real rate profile in Turkey improved considerably.
Today, price action in FX markets will likely have a better foundation as the Fed’s Jackson Hole symposium formally starts. Based off of yesterday’s TV interviews with present and former regional Fed presidents, it seems policymakers from the US will be aiming to maintain a relatively hawkish narrative despite the recent round of economic data suggesting monetary policy may already be well calibrated. While the economic calendar is populated with an abundance of public appearances from FOMC officials, it is naturally Chair Powell’s opening remarks at 15:05 BST that will draw all of the market focus. Should Chair Powell manage to effectively sell markets this hawkish narrative once again, it is likely the dollar DXY index will close out the week above the 104 handle.
The euro ground lower over the course of yesterday’s session, falling around half a percent against the dollar, as Wednesday’s weak set of PMI releases continued to weigh on growth sentiment. In that vein, this morning’s final reading of German GDP data confirmed flash estimates that Europe’s largest economy failed to grow in the second quarter. The news saw yesterday’s trend for the euro continue, with EURUSD down another three tenths to start this morning’s European session, with IFO survey data due at 9:00 BST unlikely to improve the picture. The key risk event for the day for euro watchers though, is of course, Jackson Hole. Whilst largely dominated by Fed speakers, ECB president Lagarde is also due to speak at 20:00 BST. Granted at this juncture President Lagarde is unlikely to say much that moves market given key inflation and wage data is due ahead of the September meeting, but that is unlikely to stop traders from tuning into her commentary given the current round of economic data leaves the central bank’s September decision very much live.
The pound spent the entirety of Thursday in retreat, ultimately falling half a 0.5pp against the euro and a full percentage point on the dollar. The moves came despite very little market moving news out of the UK yesterday, with markets instead continuing to digest the weak set of PMI data from Wednesday whilst gearing up for the start of Jackson Hole. The former has seen traders now almost entirely discount the possibility of a jumbo rate hike at the BoEs September meeting. The latter though is likely to be the focus of attention today. Granted, GfK consumer confidence data out this morning showed a marginal improvement rising from -30 to an above expectations -25, but this failed to generate much impetus for sterling, as did an expected reduction in the UK’s energy price cap. Instead it is central bank speakers that are likely to hold the key for today’s price action, with the UKs most notable representative, the Bank of England’s Ben Broadbent, due to speak on a panel tomorrow.
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