Jackson Hole: Powell Sticks to Script, Dollar Closes Six Weeks of Gains
At the annual Jackson Hole Economic Policy Symposium, US Fed Chair Jerome Powell was seen to be leaning slightly hawkish, warning of additional rate hikes as inflation remains too high. There was also a more firm language around the 2% inflation target, putting speculations that Fed may consider raising the inflation target to rest. However, comments were balanced as he acknowledged the moderation in price pressure and said the Fed would proceed carefully on whether to tighten further.
US economic data has continued to surprise to the uprise for now, which Powell thought could put further progress on inflation at risk and warrant further tightening. Given the longer -term focus of the conference, it was a surprise that Powell stuck to a data-dependent approach and did not show any concern for the deteriorating outlook of the US banking sector. The event was a reminder of the complexity of the end-of-cycle dynamics, where cyclical disinflation trends are noteworthy but inflation faces structural upside risks from green transformation and a fragmenting world.
These hawkish-leaning comments from Chair Powell saw market push the rate cut expectations to June 2024 from a month earlier previously. However, the market is still reluctant to price in any further rate hikes at this point, and a data-dependent approach will likely be maintained. This week’s July PCE may continue to signal the cyclical disinflation, but focus would be largely on nonfarm payrolls and ISM manufacturing due on Friday to assess whether there are any risks of an inflation upside in the near-term.
The speech was overall positive for the dollar, as it left some scope for further tightening that is currently not priced in by the markets. If data supports and markets price in another Fed rate hike, the USD could push higher. Even if the data continues to weaken modestly, as is evident currently, Powell has reaffirmed that the Fed is not in a hurry to cut rates. More urgency to cut rates is still seen in Europe, UK or China, which still enables a favourable environment for now, unless US economic data deteriorates materially to push forward interest rate cut projections forward. In that case as well, a safety bid for the dollar cannot be ruled out.
US dollar saw choppy price action as Powell spoke at the symposium, but the high-for-longer message drove short-term Treasury yields higher with the 2-year closing at 5.08%, its third consecutive weekly gain, and seeing some further upside in the Asian session today. DXY index is threatening critical resistance at 104.30 and may however be prone to some consolidation/retracement after six consecutive weeks of gains. Near-term support at 103.50 ahead of the 200DMA at 103.12.
Market Takeaway: Dollar index up-trend still intact – some consolidation risk to 103-103.50 ahead of Friday jobs report.
ECB’s Lagarde Stays Away from Near-Term Policy Direction
While structural influences on inflation and a “new playbook” were essential parts of the ECB President Lagarde’s speech at Jackson Hole, there were still little signals on what comes next at the September meeting for the central bank. Lagarde highlighted the importance of establishing interest rates at a sufficiently restrictive level for a prolonged period to ensure the prompt attainment of the 2% medium-term inflation objective. Still, there was no confirmation about another rate hike, and markets remain reluctant to price in a September rate hike after dismal Eurozone PMI readings earlier. German Ifo business climate also suggested further weakening on Friday, falling for the fourth month in a row and adding to fears that the economy may be heading for its second recession in the year.
CPI reading for the Eurozone is due out on Thursday and a firm core print could bring some increase in pricing of a rate hike in September, even as core inflation is expected to cool from next month. Next month’s CPI data will however not be available in time for the ECB’s meeting on 14 September, and Lagarde’s comments suggested that she doesn’t trust inflation models based on old data given we are in this new regime of higher structural inflation. This could mean that August inflation print this week will be a make-or-break matter for ECB expectations, before economic risks elevate further. EURUSD pushed to fresh over 2-month lows of 1.0766 before recovering to 1.08 handle in the Asian session. Support at 1.0750 and upside could bring support-turned-resistance at 1.0835 in focus.
Market Takeaway: Correction risk in EURUSD up to 1.0835 with eyes on Eurozone August CPI.