FX Update: Powell Fed between a rock and a hard place

Forex 6 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  The Fed isn’t really in control of where it must head, but it can determine the pace of its progress, and therefore will drive the near term gyrations across asset classes. On that account, all eyes and ears are on Powell’s speech this Friday at Jackson Hole.


Trading interest

  • Maintaining long AUDNZD with stops below 1.0470 now for 1.0625 and eventually 1.0700
  • Staying short EURJPY for 112.00 as long as remains below 119.50
  • Long USDCAD for 1.3500+ with stops below 1.3240

Markets are quiet ahead of a number of important inputs in coming days, especially as we await a sense of whether the Fed is catching up with the curve or still behind it as we get a look at tonight’s FOMC minutes and, more importantly, Fed Chair Powell’s speech on Friday. What I will be looking for in the minutes and especially the speech is whether the Fed begins to recognize the dynamic that is driving its policy to zero and into QE: tightening liquidity due to Trump’s escalating deficits. On Friday, Powell is expected to speak on “challenges for monetary policy” – challenges indeed as Powell is firmly wedged between a rock and a hard place. The Fed must abandon all principles and head straight to zero and restart massive QE – likely to balloon to $200 billion per month or more if the US is tilting into a recession over the coming few quarters - or crash global markets and lose control of the interest rate if it fails to restart balance sheet expansion rather soon. The Powell Fed can only choose whether they would like to control the policy rate or control the Fed’s balance sheet – there is no real other choice as Trump’s deficits are in the driver’s seat.

Signs of a Brexit thaw? An interesting day yesterday from EU leaders, first as European Council President Donald Tusk penned a rather brusque tweet, followed by much softer rhetoric from German Chancellor Angela Merkel, who suggested yesterday that there are ways to create a  “practical solution” to Brexit that doesn’t involve reopening the exit agreement. “The moment we have a practical arrangement with which we can uphold the Good Friday agreement and still define the limits of the domestic market, we won’t need the backstop anymore.” Whether this can continue to reverberate in the near future is an open question, but it is an important signal.

Risk appetite eased yesterday near important resistance in the major US equity indices, but has bounced again overnight, taking the JPY down a couple of notches and EM up a couple of notches, though trading ranges are very compressed. All are waiting on the signal from the Powell Fed on Friday for the next move up or down in risk and the US dollar.

We await signs from the ECB minutes tomorrow, as well as the flash August EU PMI’s. The Italian drama is on a slow boil after yesterday’s resignation of the political unaffiliated Prime Minister Conte, now awaiting whether the Five Star Movement can piece together an awkward coalition or President Mattarella calls elections (which have a strong chance of delivering a Lega led, all rightist coalition). Italian yields are still well elevated relative to Spanish and Portuguese counterparts, but the recent developments see the yield spread to Germany yawning in the middle of the recent range. As our Christopher Dembik points out – Japanese investors, among others, have been active in the Italian sovereign market.

The G-10 rundown

USD – all about whether the Powell Fed can pull ahead of the curve here as indicated on Friday. A tall task to deliver a sufficiently dovish blast to the market.

EUR – EURUSD is heavy toward the bottom of its range. The status for all USD pairs hinges on Friday’s Powell speech. So far little drama in Italian bond markets (or in the euro) on the latest political developments, well-covered by Bloomberg’s John Authers covers very well this morning.

JPY – the yen has lost energy here – waiting for further  invigoration of the recent rally via lower yields and risk off or squeeze risk starts to set in – staring with around 107.00 in USDJPY.

GBP – sterling saw modest support from Merkel’s comments yesterday – headline risk remains extreme – technically, the 0.9100 area in EURGBP the closest pivot area of note for indicating more significant sterling strength.

CHF – not much seems to quicken the pulse for the France – no real reactivity to yesterday’s Brexit and Italy news flow – suggests EURCHF heavy until proven otherwise, with SNB leaning heavily against the move.

AUD – the pause button pressed two weeks ago in AUDUSD as we await news from the Aussie economy, whether US-China sit down to talk, and Powell’s speech.

CAD – as we discussed yesterday, Canadian CPI today a key data point for whether USDCAD rally can punch through the important 1.3300-25 zone (weak attempt yesterday unsuccessful).

NZD – AUDNZD upside remains in focus as the RBNZ has pulled ahead of the RBA in the competitive devaluation game. The high-flying New Zealand A2 Milk company’s stock took a large hit overnight

SEK – EU PMI’s perhaps the next focus as SEK may wilt further on additional signs of the EU economy slipping, with risk appetite an important input at the margin for SEK direction.

NOK – EURNOK consolidation still very organized in the 10.00 area.

 

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – Canada Jul. CPI
  • 1400 – US Jul. Existing Home Sales
  • 1800 – US Federal Reserve FOMC Meeting Minutes
  • 2230 – US Fed’s Kashkari to Speak 

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.