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

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

Forex 6 minutes to read
John Hardy

Head of FX Strategy

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 


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992