USD: Cautious Powell may give some help to the dollar – ING

The latest batch of US data has not firmly argued in favour of a 50bp Federal Reserve rate cut in September, and most FOMC members have also appeared to moderately push back against that prospect in recent off-meeting comments. Yesterday, US services S&P Global PMIs were stronger than expected and compensated for another decline in manufacturing, while initial jobless claims rose only slightly, in line with consensus, to 232k. Continuing claims – a measure of the difficulty of re-entering the workforce – were less than expected and were revised lower for the previous week, ING’s FX strategist notes.

All eyes on Jackson Hole

“The payroll revisions published earlier this week showed the jobs market is loosening from a weaker position, but other activity/jobs indicators are not flashing amber, which should allow Fed Chair Jerome Powell to keep communication relatively balanced as he speaks at Jackson Hole today (1500 BST). He will probably use this speech to prepare markets for a September cut.”

“When looking at market pricing, there is probably not much incentive to open the door to a 50bp move at this stage. 100bp is fully expected over the next three meetings, and the market tendency to price in more aggressively on the dovish side means hints of half-point moves could take the Fed funds futures curve uncomfortably low for the Fed. It appears more likely that Powell will re-emphasise the focus on both sides of the mandate.”

“The risks for the USD are slightly upside-tilted today in our view. That said, we don’t expect Powell’s speech to have long-lasting ramifications for FX, and we retain a bearish bias on USD in the near term as the rebuilding of speculative positions following the recent rebalancing still looks more likely to favour dollar shorts.”