Chief Macro Strategist
Summary: Fed Chair Powell delivered as dovish a speech as anyone could have expected at the Jackson Hole symposium on Friday, taking the US dollar lower with the outlining of his thorough conviction that the recent bout of high inflation will prove transitory. The reaction to the speech was sharp, if still quite modest as we now watch for any follow-on reaction now that the USD looks down for the count ahead of important data this week.
FX Trading focus: Will the Jackson Hole reaction fizzle?
Ahead of Powell’s speech on Friday, I thought that the only real surprise scenario in the speech would be on the hawkish side, simply because the bar for a surprise in that direction looked extremely low to non-existent. This meant that even the slightest hint of Fed concern on inflation or its outlook might have looked hawkish. Instead, Powell actually managed to surprise on the dovish side by very confidently expressing and outlining the case for the Fed’s view that the recent bout of inflation will prove transitory. Much of that argument centered on the argument that the generous stimulus saw unprecedented demand for durable and real goods, a development that will revert to trend once the services-side of the economy can normalize and consumption patterns shift. It is a fairly compelling narrative, but only if the world reverts to pre-pandemic norms, something we’re far from convinced will happen.
As we discussed in this morning’s Saxo Market Call podcast, the Fed’s confidence could prove to be hubris in the longer run, given 1) that Covid could continue to disrupt the supply side of the economy as it is peaking in impact in Asia, the world’s factory, right now 2) inventories are so aggressively drawn down for many key products like semiconductors and cars that the sheer amount of time to bring them back to normal may prove uncomfortably extended 3) a “deglobalizing” and supply chain diversification drive for geopolitical reasons (US-China rivalry) and because of vulnerabilities laid bare by the pandemic is underway 4) the green agenda and 5) a transformed attitude to fiscal stimulus: any time the economy weakens, the impulse will be to throw another few stimulus logs on the fire.
So, the market sees this speech as a green light for doing more of what it was already doing – buying risky assets as there is simply no prospect for the Fed pulling away the punch bowl any time soon. It may be a reasonable reaction and the US dollar may continue to roll over on this, but I am not sure that the Fed’s tapering timing and maybe even pace are the immediate burning question for this market, so the reaction has some chance of fizzling early this week and keeping the uncertainty level high ahead of important data points from the US later this week, uncertainty on the course of the virus and finally, looking forward to the risk that the recovery is rolling over badly at the moment (a bit more on that below in the US data focus for this week).
Chart: EURUSD
The reversal of the price action below 1.1700 of late now looks complete after Friday’s rally and I did say last week that a close near/above 1.1800 does suggest a reversal and a local low now in place. But ranges are very compressed, and given my concerns noted above, among those that the reaction to Jackson Hole could prove an unreliable indicator, I’m holding off judgment on the directional potential here for now – waiting for a challenge of 1.1900+ to consider a larger scale rally scenario, while simply neutralizing Friday’s move in the first half of this week will go a long way to re-energizing the bears.
Upcoming US data – I retweeted an article this morning citing some of the high frequency data that shows decelerating US economic activity, a partial confirmation of the weaker Aug. US ISM Services PMI – watching the US Aug. ISM Services number on Friday for further confirmation of this as well as the Conference Board Consumer Confidence measure for August up tomorrow to see if it also fell off a cliff like the University of Michigan survey this month.
Germany – Thoughts on inflation and SPD rising after debate. The weekend debate between the three major Chancellor candidates of the CDU, Greens and SPD saw the pundits calling a debate win for the SPD’s Schulz. The latest polls show the SPD creeping ever higher and over-taking the CDU/CSU bloc now. See more on the election on from our Christopher Dembik. I am publishing this before today’s flash nationwide German CPI data, but all of the regional surveys out this morning are coming in hot, so I’m not expecting a low number. And the great Wolfgang Münchau encourages us to watch out for the large service sector union out campaigning for a 5% wage increase this year.
Table: FX Board of G10 and CNH trend evolution and strength
The trends have largely flipped back to neutral and it is tempting to trade the momentum in the reversals, but if the Jackson Hole reaction fizzles out ahead of Friday’s important data points, we may be in for treacherous, rangebound activity this week.
Table: FX Board Trend Scoreboard for individual pairs
Note all of the zeroes and ones in the Trend “Age” here showing the neutralization of previous trends, including in big USD pairs like EURUSD and USDJPY, as well as USDCNH as we watch for whether the move holds in the first half of this week.
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