Dollar plummets as Powell opens the door wide to rate cuts
At the Jackson Hole, Wyoming, annual central bank conference, Fed chair Powell left no doubt that he considers the fight against inflation as good as won and that the central bank’s priority has now shifted to preventing a serious deterioration of the US labour market.
Highlights:
The US dollar fell against every major currency worldwide.
Fed seen cutting rates aggressively in 2024.
Euro rises to yearly highs on narrowing US-Eurozone rate differentials.
UK interest rates will likely be the highest rates in the G10 in the coming months, which should support the pound.
Markets responded by sending risk assets soaring, increasing their bets on a 50-basis point cut at the September meeting, and fleeing the US dollar, which fell against every major currency worldwide. The only exceptions were Latin American ones, which continue to be weighed by increasing political jitters around Brazil and Mexico’s leftist governments.
With the Fed set to ease, perhaps faster than European central banks, the path of least resistance for the dollar may be down, particularly in view of its still expensive valuation. This week, the narrative will be tested by two key inflation reports on either side of the Atlantic. On Friday, the Fed’s preferred inflation measure, the Personal Consumer Expenditures (PCE) report for July and the Eurozone’s flash inflation number for August will be released.
USD
The clear Federal Reserve pivot to worrying more about a potential labour market slowdown and (much) less about inflation is perhaps the ideal cocktail for asset prices, including stocks, credit, and commodities.
The early August sell-off in markets has been all but forgotten, investors are snapping up risk assets, and the US dollar is falling. We do not disagree with a general downward trend for the greenback but do think that the four cuts before year-end that are being priced in by markets are excessive, even after the downward revision in job creation last week. High frequency indicators like weekly jobless claims are still consistent with a healthy job creation and consumption growth, and this should nudge the Federal Reserve towards cutting rates cautiously.
EUR
ECB officials are taking a very cautious line when it comes to further rate cuts, which contrasts with the less guarded optimism we are seeing from Federal Reserve officials. The resulting compression in interest rate differentials is providing a strong tailwind to the Euro, which has broken out of its recent range against the dollar.
There are hints that inflation pressures in the Eurozone are proving stickier than in the US, and good news on the economic front (particularly, better-than-expected service PMI numbers) have removed some of the urgency of monetary stimulus. The flash inflation report for August out this Friday is a particularly important piece of information, as markets try to figure out whether the ECB can afford to ease at a faster pace than just one 25 bp cut per quarter.
GBP
The PMI indices of business activity for August provided further proof of the healthy state of the UK economy, with both the manufacturing and service sectors posting numbers consistent with solid and even modestly accelerating growth. The Bank of England signalled continued cuts, but it kept its cautious tone. We think this opens a bit of a sweet spot for Sterling, as healthy growth is combined with a cautious central bank and what will likely be the highest rates of any G10 economy for at least the next few months.
Economic Calendar – 26.08.2024-30.08.2024
Monday (26.08):
Durable Good Orders (Jul) USD 13:30
Tuesday (27.08):
GDP (Q2) Germany 07:00
Consumer Confidence (Aug) USD 15:00
Wednesday (28.08):
Inflation (Jul) AUD 02:30
Thursday (29.08):
Retail Sales (Jul) NOK 07:00
GDP (Q2) SEK 07:00
Retail Sales (Jul) SEK 07:00
Preliminary Inflation (Aug) Germany 13:00
GDP (Q2) USD 13:30
Friday (30.08):
Retail Sales (Jul) AUD 02:30
Preliminary Inflation (Aug) EUR 10:00
GDP (Q2) CAD 13:30
PCE Inflation (Jul) USD 13:30