In the past dozen years or so, the central bankers' symposium in Jackson Hole has become the stage on which US monetary authorities have revealed their cards. During Friday's speech at the resort in the heart of the Rocky Mountains, Jerome Powell confirmed that monetary easing in the US will begin in September. This does not come as the slightest surprise to the markets; such a scenario has been considered a foregone conclusion for weeks. The Fed chief did not open the door wider to aggressive cutting. A flexible approach is not enough to lead to a correction in the market valuation of the scale of the upcoming cuts and consequently support the overvalued dollar. The EUR/USD pair touched 1.12. The pound against the USD has been at its strongest in almost 2.5 years, so the GBP/USD has crossed 1.32.
Jerome Powell softened the tone compared to the FOMC conference after the July meeting, which may not be surprising given the dismal report showing the condition of the labour market in July. The emphasis in the communication was shifted from the monthly jump in core inflation to the unemployment rate. Risk appetite remains strong after the Fed chief's speech. The US dollar is losing ground, bonds and equities are appreciating, and currencies from the emerging markets basket are scoring a strong rebound. The market valuation of around 100 bps of cuts in 2024 persists. The probability of a move of half a percentage point at the 18.09 meeting is still estimated at around 30%.
The demise of the myth of the US economy's resilience to restrictive monetary policy and the cementing of the belief that the Fed will cut interest rates decisively have put the US currency under pressure over the past weeks. The euro-dollar exchange rate has risen by more than 3% since the beginning of the month and climbed to 1.12, reaching its highest level since July 2023. Conotoxia's fintech forecasts have long been characterised by a sceptical attitude towards the US currency. On a broader horizon, we continue to view the USD outlook negatively. The recent wave of weakness in the short term may be difficult to sustain and the discount of impending easing exaggerated. Given today's UK bank holiday and month-end flows, a sharp turnaround in the USD in the next few hours seems quite unlikely.
The decisive factor for the USD's fortunes will be the labour market report for August (publication on 6 September at 2.30 pm), which is unlikely to exacerbate recession fears, as the rise in the unemployment rate to 4.3 per cent was largely due to one-off factors. At the same time, the surge in support for Kamala Harris appears to be breaking down. The uncertainty surrounding Donald Trump's potential return to the White House will not support a continuation of the USD sell-off. At the end of the month, on the other hand, the results of NVIDIA, a company playing a central role in the bull market linked to hopes for the development of artificial intelligence, will be important for sentiment.
This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.
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20 Aug 2024 11:00
The Riksbank resumes rate cuts, but refrains from a 50 pb reduction
In the past dozen years or so, the central bankers' symposium in Jackson Hole has become the stage on which US monetary authorities have revealed their cards. During Friday's speech at the resort in the heart of the Rocky Mountains, Jerome Powell confirmed that monetary easing in the US will begin in September. This does not come as the slightest surprise to the markets; such a scenario has been considered a foregone conclusion for weeks. The Fed chief did not open the door wider to aggressive cutting. A flexible approach is not enough to lead to a correction in the market valuation of the scale of the upcoming cuts and consequently support the overvalued dollar. The EUR/USD pair touched 1.12. The pound against the USD has been at its strongest in almost 2.5 years, so the GBP/USD has crossed 1.32.
Jerome Powell softened the tone compared to the FOMC conference after the July meeting, which may not be surprising given the dismal report showing the condition of the labour market in July. The emphasis in the communication was shifted from the monthly jump in core inflation to the unemployment rate. Risk appetite remains strong after the Fed chief's speech. The US dollar is losing ground, bonds and equities are appreciating, and currencies from the emerging markets basket are scoring a strong rebound. The market valuation of around 100 bps of cuts in 2024 persists. The probability of a move of half a percentage point at the 18.09 meeting is still estimated at around 30%.
The demise of the myth of the US economy's resilience to restrictive monetary policy and the cementing of the belief that the Fed will cut interest rates decisively have put the US currency under pressure over the past weeks. The euro-dollar exchange rate has risen by more than 3% since the beginning of the month and climbed to 1.12, reaching its highest level since July 2023. Conotoxia's fintech forecasts have long been characterised by a sceptical attitude towards the US currency. On a broader horizon, we continue to view the USD outlook negatively. The recent wave of weakness in the short term may be difficult to sustain and the discount of impending easing exaggerated. Given today's UK bank holiday and month-end flows, a sharp turnaround in the USD in the next few hours seems quite unlikely.
The decisive factor for the USD's fortunes will be the labour market report for August (publication on 6 September at 2.30 pm), which is unlikely to exacerbate recession fears, as the rise in the unemployment rate to 4.3 per cent was largely due to one-off factors. At the same time, the surge in support for Kamala Harris appears to be breaking down. The uncertainty surrounding Donald Trump's potential return to the White House will not support a continuation of the USD sell-off. At the end of the month, on the other hand, the results of NVIDIA, a company playing a central role in the bull market linked to hopes for the development of artificial intelligence, will be important for sentiment.
See also:
The Riksbank resumes rate cuts, but refrains from a 50 pb reduction
Inflation in the US will not stand in the way of the Fed's September rate cut. The US dollar is a hair's breadth away from this year's lows
Markets stunned by shocking outcome of French elections
The euro bounces after the French vote
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