Fed Chair Jerome Powell will deliver his much-awaited keynote speech at the Jackson Hole Symposium today. Yesterday, comments by other Fed officials largely fell on the hawkish side of the spectrum suggesting rates should be raised to the 3.75-4.0% mark by the end of this year. Markets will be scanning Powell’s speech today from a number of different perspectives: inflation, growth outlook, front-loading, and any hint of easing in 2023. All these factors can play a different role in driving the reaction in the FX market, although we see a quite elevated risk that Powell may end up broadly matching the generally hawkish market expectations and avert any significant market shock. Most analysts expect that today’s speech will keep the notion of data dependency well intact, and potentially put off a big chunk of what could have been today’s market reaction until next week when US jobs figures are released.
The US dollar set a five-day low yesterday, slightly below CAD1.2900. It was probing the CAD1.3060 area in the first two sessions this week. The pair is currently trading around CAD1.2935 and it needs to resurface above CAD1.2960-80 to open up a move toward 1.3050 again. Markets continue to lean towards a slightly more hawkish outcome for the BoC’s Sep policy decision than the Fed’s. For today, spot will continue to track the broader USD tone.
Today’s price action in EUR/USD should be entirely driven by the dollar reaction to Powell’s speech, unless some further developments on the gas crisis story come to the forefront. We expect a moderately dollar-positive impact from Powell and expect the EUR/USD to test 0.9900 support. The minutes of the ECB’s July meeting released yesterday didn’t bring anything new to the table. Concerns about a weak euro have become a very central theme within the Governing Council: expect to hear more on this topic from an intensifying ECB speakers activity next week, even though the ECB’s ability to offer a solid floor to the euro has been limited given the persistence of high energy prices.
The pound lacks any domestic drivers today and should move mostly in line with the dollar reaction to Jackson Hole. A break below the 1.1730 lows from earlier this week may well be on the cards on the back of USD strengthening, as 1.1500 is looking like a strong possibility.