USD continues to strengthen ahead of keynote speeches at Jackson Hole

USD: Jackson Hole speeches from Powell & Lagarde in focus

The US dollar has continued to strengthen overnight ahead of today’s keynote speech from Fed Chair Powell at Jackson Hole. It has resulted in the dollar breaking through important technical resistance levels as the dollar index moved back above the 104.00level. EUR/USD has fallen below its 200-day moving average which comes in at around the 1.0800-level for the first time since November of last year. As we have been highlighting recently the US dollar has been benefitting in the near-term from heightened investor concerns over growth outside of the US especially in China and Europe while the US economy is proving more resilient than expected so far this year. It has resulted in yield spreads moving back in favour of the US and made the US dollar relatively more attractive. We are not expecting today’s keynote speech from Fed Chair Powell to change the current trading dynamic. If Fed Chair Powell comments on the outlook for monetary policy, we would expect him to signal that the Fed is approaching the end of their rate hike cycle with future policy decisions data dependent. At the same time, we would expect him to reiterate that the Fed then plans to leave rates on hold for some time before beginning to lower rates next year when they have more confidence that inflation is continuing to fall back towards their 2.0% target. Going into today’s speech from Fed Chair Powell, the US rate market is pricing in around 5bps of hikes by the September FOMC meeting and 14bps by November. We would not expect those expectations to change significantly today unless Chair Powell delivers a dovish surprise and formally ends the hiking cycle which appears unlikely. For next year the US rate market is already pricing in around 96bps of rate cuts. We would not expect Fed Powell to strongly push back against those expectations at the current juncture. It is consistent with the Fed’s own forecast for 100bps of cuts in 2024 that were signalled in the DOT plot at the June FOMC meeting. We still believe that the Fed will be encouraged to lower rates next year by slowing inflation that will not require monetary policy to remain as restrictive.         

ECB President Lagarde is also scheduled to speak today at Jackson Hole. Her comments could prove important for euro performance given that the euro-zone rate market pricing has become more finely balanced over whether the ECB will deliver another 25bps hike in September. There are currently around 12bps of hikes priced in for September. The weaker euro-zone PMI surveys this week have encouraged market participants to further scale back expectations for one final ECB hike this year which has been weighing down on the euro. It fits with our own forecast for the ECB to leave rates on hold in September. Market participants will be listening closely to assess which way President Lagarde appears to be leaning. If she puts more emphasis on recent weaker growth momentum and that monetary policy is now sufficiently restrictive it would trigger further euro weakness although the release of the latest euro-zone CPI report for August which is released next week will also be important. ECB governing council member Nagel has stated overnight that it is too early to think about a pause highlighting that another hike remains in play. 

CBOT TRIGGERS SHARP RALLY FOR TRY

Source: Bloomberg, Macrobond & MUFG GMR

TRY: CBoT delivers large hike helping to restore investor confidence

The biggest mover in the foreign exchange market yesterday was the Turkish lira as it surged higher by around 7.7% against the US dollar following the CBoT’s latest policy meeting. It has been giving back some of those initial gains overnight but it still around

4.0% stronger than prior to the CBoT’s policy meeting. The strong rally for the lira was triggered by the CBoT’s decision to deliver a much larger than expected rate hike of 7.50 percentage points that lifted the policy rate up to 25.00%. The policy rate has now been increased by 16.50 percentage points in total since June, and now exceeds the peak from back in 2018 and 2019. On that occasion USD/TRY fell from a peak of 7.2362 in August 2018 to a low of 5.1344 in November 2018. 

Higher rates should again begin to offer more support for the lira after the larger hike helped Turkey to regain policy credibility. Investors will now have more confidence in the shift back to more orthodox policy settings that has been taking place since the elections in May. The new leadership team at the CBoT including new Governor Erkan have sent a strong signal that they are committed to bring down inflation. The CBoT was under increasing pressure to deliver larger rate hikes after inflation accelerated back up to 47.8% in July. The CBoT expects inflation to increase further to 58.0% by the end of this year. As a result, we expect the CBoT to deliver further larger hikes at upcoming policy meetings to lift the policy rate closer towards 35.0%. At the very least the developments should slow the pace of further lira depreciation through the rest of this year and pose downside risks to our USD/TRY forecasts (click here), although we are not convinced yet that conditions are in place for a sustained rebound. The  four month forward rate for USD/TRY has dropped from close to the 30.000-level to 28.600.

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	09:00	German Business Expectations	Aug	83.8	83.5	!!
GE	09:00	German Current Assessment	Aug	90.0	91.3	!!
GE	09:00	German Ifo Business Climate Index	Aug	86.7	87.3	!!
EC	12:00	ECB President Lagarde Speaks	--	--	--	!!
US	15:00	Michigan Consumer Sentiment	Aug	71.2	71.6	!!
US	15:05	Fed Chair Powell Speaks	--	--	--	!!!
EC	20:00	ECB President Lagarde Speaks	--	--	--	!!

Source: Bloomberg