Fed's unwillingness to pivot lifts the USD, EUR unimpressed by larger hikes looming (Daily analysis 29.08.2022)

On Friday, the currency market became the arena for verbal clashes between the most important central bankers. Their echoes are not silent until now. Just before the Fed chief's speech in Jackson Hole, which was scheduled, and indeed highly anticipated and was the highlight of the past week, quotes were shaken by rumours of upcoming steps from the European Central Bank. Ultimately, Jerome Powell's words had a greater effect. Their result was the strengthening of the dollar and the EUR/USD's finish to the week below parity, a more than 3% plunge in the main Wall Street indexes, or Bitcoin's drop below 20,000 USD. To put it in a word: a powerful intensification of risk aversion.

What is the reason for such a reaction from investors? The message from the under ten-minute speech is clear. The Fed remains committed to prioritising the fight against inflation over concerns about the deteriorating fortunes of many areas of the US economy. Ensuring price stability remains the overriding priority. Rate hikes will continue. The strategy will not change under the influence of a few worse readings. The possibility of a rate cut in 2023 has not even been mentioned. This is water on the dollar mill. At the same time, the assessment is confirmed that the short-term weakening correction of the dollar was derived from an aura of anticipation of key speeches by central bankers and not the beginning of a change in the trend to the unfavourable one for the US currency.

The EUR/USD exchange rate failed to break through the 1.0 barrier on a sustained basis for the third time in several days. As a result, the single currency is at risk of further weakness, with the main currency pair falling to 0.97. The euro was only momentarily helped by rumours suggesting a growing fraction in the ECB Governing Council in favour of a rate hike of more than 50 basis points at the meeting on 8 September. The key risk remains a surge in energy prices. Fear of a gas crisis is likely to remain strong in the coming days. After all, the day after tomorrow will see the start of a three-day interruption in Russian supplies due to further maintenance work on Nord Stream.

As in July, the Old Continent will be plagued by concerns about whether, when and how much gas will flow west. Markets remain extremely jittery and there is no solid reason to expect an improvement in investment sentiment, which would also benefit major emerging market currencies. Rising valuations of Fed and ECB intentions and galloping energy prices in the coming days will be confronted by a series of data from the world's major economies led by Friday's US labour market condition report for August.