Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of FX Strategy
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The U.S. dollar was the weakest performer in the G-10 forex space last week, As Fed Chair Powell delivered another policy pivot at the Jackson Hole conference. Powell’s message that the ‘time has come’ for rate cuts provided greater conviction to the markets on a September rate cut. More importantly, he did not close the door for even a 50bps rate cut as he avoided the more careful words used by other Fed members last week hinting at more ‘gradual and ‘methodical’ easing. Chair Powell’s speech also showed greater sensitivity to labour market weakness, in an effort to ensure a soft-landing, suggesting that any further rise in unemployment rate could keep the markets hoping for a 50bps rate cut in September.
This makes the second estimate of Q2 GDP and initial jobless claims (both due Thursday) the key metrics to watch this week. While core PCE deflator remains the Fed’s preferred inflation gauge, the Fed is currently more focused on growth metrics than inflation. This suggests that any upside surprise in core PCE will have to be of significant magnitude to re-ignite inflation concerns.
While the door remaining open to larger Fed rate cuts could mean further US dollar downside this week, there are a few other critical factors to watch, including:
The euro has remained remarkably resilient last week despite the dismal PMI numbers from Germany. This is clear proof that unlike the Fed, markets remain more concerned about inflation and wage dynamics in the Eurozone rather than the growth dynamics for now. While the ECB’s measure of negotiated wages did show a slowdown from 4.7% to 3.6% in Q2, the German wage data painted a more concerning picture suggesting that inflation may remain elevated for some time.
Markets are seemingly comfortable expecting less than 25bps of rate cut at the ECB’s September meeting, and less than three full rate cuts priced in for this year. Inflation data this week will have to show a significant upside or downside surprise for this to change. As such, the euro could remain a play on USD moves, rather than on ECB policy expectations for now.
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