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Where Are the Dollar, Yen, and Euro Headed Now?

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The much-anticipated gathering of central bank heads in Jackson Hole, Wyoming, is over, and the markets are expected to embark on a new trajectory. The event didn’t have any major surprises, unlike previous editions, but there was plenty to shake up the markets.

Typically, September sees a turn-around in market sentiment. Normally, the summer sees markets drifting higher but then reverse after US Labor Day. But this summer, markets haven’t gained all that much momentum. Traders appear to be increasingly convinced that a major recession is no longer as big of a risk in the near term. Given what transpired over the weekend, there are some things that could guide the major currency pairs going forward:

1- The Dollar Stays Strong

Fed Chair Jerome Powell tried to please both the hawks and the doves with his speech, with the result that not all that many people were happy. Investors hoping for a “mission accomplished” statement were disappointed that nothing was said about how long rates would remain high. Those worried about a more aggressive stance might have been a bit relieved that there was no talk of more rate hikes. Powell, as we anticipated last week, stayed the course, which gave the dollar a bit of a boost at the expense of risk appetite.

Powell did say the Fed would be cautious about its future actions in light of the data, so now there is renewed pressure on the NFP and CPI figures which come out before the next meeting in September. Futures markets are now pricing in a 50/50 chance of one more rate hike this year, with the consensus being in November. But, another miss on the jobs front, or inflation coming down faster than expected, could erase the dollar’s recent gains.

2- No Commitment from the ECB on the Euro

ECB President Christine Lagarde also spoke at Jackson Hole, and quite evidently avoided addressing future rate hikes. As we anticipated last week, markets were left with her previous stance on inflation: it’s too high for too long, which gives the impression that the ECB will go through with another hike at the next meeting in September.

But, that could change later this week if core inflation surprises to the downside once more. A faster declaration in the change in consumer prices has been a theme, lately, with Europe seeing falling demand as the higher prices bite consumer’s pocketbooks. The ECB’s actions so far have not abated surging housing and rent prices, which is proving to be a challenge for an economy teetering on the edge of a recession. It might mean that this month’s release of GDP figures for the share economy might be more determinant than inflation for the future of the Euro.

3- Japan Remains Stubborn on Easing

BOJ Governor Kazuo Ueda raised eyebrows when he said that underlying inflation was still below the bank’s 2% target. That was particularly notable after core and core-core inflation has been reported around or above 3% for months. Ueda said this was a reason to heed the easing policy the bank has maintained for an extended period of time.

With the BOJ reluctant to change policy to protect the yen, it has been foreign events that have helped keep the currency from falling even further. China’s announcement of new stimulus measures over the weekend helped prompt hope that demand for imports would increase. Japan, as a major supplier of machinery to China, could see the yen strengthen if China finally returns to growth.



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