USD rises with all eyes on Powell at Jackson Hole – Daily Market Brief, August 26, 2022

Federal Reserve Chair Jerome Powell’s speech at Jackson Hole is expected to have a hawkish tone as he reiterates the central bank’s commitment to bringing inflation lower, potentially lifting the USD.

·         EUR/USD falls after German consumer confidence plunges to -36.8

·         DXY heads towards 109.00 on expectations of a hawkish stance from Fed Powell

·         US core PCE is expected to tick lower to 4.7%

European markets booked modest gains yesterday helping stage a recovery from the steep selloff at the start of the week. A massive Chinese stimulus package and better-than-expected data from Germany helped stocks to a positive close. 

Still, it looks like a case of too little too late as the indices head for weekly declines. The FTSE is set to lose 0.9% this week snapping a five-week winning run. Meanwhile, the DAX is on track to lose 2% this week, its second straight week of losses.

Wall Street closed firmly higher in low volume trade, boosted by better-than-expected GDP and jobless claims data and unfazed by hawkish rhetoric. The US economy contracted at a slower pace than initially feared and while inflationary pressures remained high, personal consumption was strong, which combined with the unexpected fall in jobless claims, painted an encouraging picture of the US economy.

German consumer confidence

In Europe, stocks are heading higher in cautious trade ahead of Powell’s speech. A slump in German consumer confidence has been shrugged off by the stock market. The DAX points to a 0.4% rise on the open.

EUR/USD is looking less perky and after yesterday’s small rise is heading lower towards 0.9950 following the dire data print.. Investors are seeking out refuge in the USD amid the energy crisis in Europe and ahead of Powell’s speech.

Fed Powell’s speech

The main focus of the day, and the week, will be Federal Reserve Powell’s speech at the Jackson Hole Symposium. The market is hoping that Powell will shed some light on how high the Fed sees interest rates rising. However, they may be left disappointed. Those hoping for a dovish pivot are also likely to be disappointed.

Recent Federal Reserve speakers have been hawkish, setting the tone for what to expect from Powell. With CPI still four times the Fed’s 2% target, the Fed’s work is yet to be done and Powell is likely to reiterate the Fed’s commitment to bring inflation back down.

CPI cooled slightly in July, but the US central bank will want more evidence that inflation is falling and not plateauing at a lower level before any sort of signal to a dovish pivot. There is still another jobs report before the September FOMC, so any guidance on the size of the hike in September is also unlikely.

According to the CME Fedwatch tool the market is pricing in a 63% probability of a 75 basis point rate hike while the probability of a 50 basis point hike has slipped to 50 basis points.

With just a few more meetings left before the end of the year and with inflation still stubbornly high, it is looking increasingly unlikely that rates will remain higher for longer heading into 2023. The Fed has indicated that it would prefer to overtighten that to underestimate rising price pressures. Powell could use today’s speech to gently warn the market that any dovish pivot is still a way off, which could lift the USD back up over 109.00 and pull gold and stocks lower.

About an hour and a half before speaking the US PCE inflation gauge will be released and is expected to ease to 4.7% down from 4.8%.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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