Weekly FX Chartbook: Powell Keeps the Door for 50bps Rate Cut Open Weekly FX Chartbook: Powell Keeps the Door for 50bps Rate Cut Open Weekly FX Chartbook: Powell Keeps the Door for 50bps Rate Cut Open

Weekly FX Chartbook: Powell Keeps the Door for 50bps Rate Cut Open

Macro 7 minutes to read
Charu Chanana

Head of FX Strategy

Key points:

  • USD: Downside bias could extend, if risk sentiment continues to hold up
  • EUR: Inflation print is unlikely to bring aggressive rate cut expectations
  • JPY: Three-legged tailwinds from hawkish Ueda, dovish Powell and Mideast escalation
  • GBP: Nothing in pipeline to question BOE’s cautious easing stance
  • AUD: CPI and retail sales to test RBA’s rate cut delay resolve
  • CAD: BOC rate cuts could remain relatively more aggressive

-------------------------------------------------------------------------------------------------------

USD: Powell Keeps the Door Open to 50bps Cut

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:

  1. Nvidia’s earnings remain key for overall risk sentiment that continues to hint towards a soft landing for now. However, any risks of pullback in demand or spending on AI could trigger a sharp reversal in risk sentiment, fueling gains in the US dollar.
  2. Risks of an escalation in geopolitical tensions also remains a key barometer of risk sentiment.
  3. The CFTC positioning data showed massive selling in the US dollar during the week of August 20, signaling room for short-term consolidation.
  4. Month-end demand for the US dollar could also underpin.

EUR: Aggressive Rate Cuts Remain Unlikely

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.

------------------------------------------------------------------------------------------------------------------------------

The US dollar pushed to fresh lows last week as Powell out-doved the markets. Sustained soft-landing hopes propelled NZD and SEK while AUD and CAD underperformed. Silver outperformed Gold.
Our FX Scorecard saw bearish momentum on the US dollar could have more legs. Meanwhile, SEK momentum could turn bearish after the Riksbank rate cut last week, while bullish momentum is sustained in JPY and NZD.
The CFTC positioning data for the week of 20 August saw massive USD selling by speculators and net long positioning down 56% to its lowest since March 2024. The euro and sterling longs built further but yen longs remained stable. Meanwhile, short positions were added to CHF.

-----------------------------------------------------------------------

Recent FX articles and podcasts:

Recent Macro articles and podcasts:

Weekly FX Chartbooks:

    FX 101 Series:

     

    Quarterly Outlook 2024 Q3

    Sandcastle economics

    01 / 05

    • Macro: Sandcastle economics

      Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

      Read article
    • Bonds: What to do until inflation stabilises

      Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

      Read article
    • Equities: Are we blowing bubbles again

      Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

      Read article
    • FX: Risk-on currencies to surge against havens

      Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

      Read article
    • Commodities: Energy and grains in focus as metals pause

      Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

      Read article

    Disclaimer

    The Saxo 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 is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 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 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 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 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 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.

    Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
    Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
    Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

    None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo 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 Markets or its affiliates.

    Saxo Markets
    88 Market Street
    CapitaSpring #31-01
    Singapore 048948

    Contact Saxo

    Select region

    Singapore
    Singapore

    Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning 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. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

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

    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 are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

    This advertisement has not been reviewed by the Monetary Authority of Singapore.

    Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.