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The DXY Index’s two-month decline hit a significant support level at 101. It remains to be seen if this is a pause or a turning point. The EUR, the most significant DXY component, is holding above 1.11 vs. USD, near the highs at the end of last year (1.1140) and July 2023 (1.1275). GBP/USD is also holding above 1.30, near the 1.3142 high last July. The Federal Reserve and the European Central Bank will likely pave, at the Kansas City Fed’s Jackson Hole Symposium today, the way for a synchronous rate cut at their monetary policy meetings in September. The Bank of England, however, may prefer to sit out September after its tight 5-4 vote to lower rates at its last meeting on August 1. Its temporary divergence with the ECB has seen the EUR/GBP cross rate retreat to 0.8490, following the rally from 0.8410 at the end of July to 0.8625 on August 8. Conversely, at a special parliamentary session today, the Bank of Japan should defend its decision to increase interest rate again through FY2025. USD/JPY has retreated to 146 after its corrective squeeze from 141.70 to 149.40 over August 5-15.
Fed Chair Jerome Powell will update the Fed’s monetary policy outlook when he speaks at 2200 SGT in Jackson Hole today. Per the FOMC Minutes for the July 30-31 meeting, many Fed officials support a 25 bps rate cut if incoming US data affirm the progress in lowering inflation amid a rising unemployment rate. Next week, the US PCE deflator and PCE core inflation will likely increase by 0.2% MoM in July, a pace the Fed will find comfortable delivering a rate cut in September. However, the YoY increase in headline inflation to 2.6% from 2.5%, and 2.7% from 2.6% for core inflation should support a normal 25 bps reduction in the Fed Funds Rate instead of the 50 bps cut discounted by the futures market. The Fed will assess the monthly jobs report on September 6 and the CPI report on September 11 before its FOMC meeting on September 17-18. The Fed will also revise its Summary of Economic Projections, which should continue to differentiate the Fed from its peers with a more predictable rate easing cycle. In June, the Fed forecast 25-50 bps of cuts in 2024, followed by 200 bps of reductions over 2025-2026. Hence, in the coming months, we cannot rule out, the possibility for the DXY to break below its 100-107 range seen in 2023-2024.
The European Central Bank should also hint at reducing interest rates in September at Jackson Hole. ECB Chief Economist Philip Lane is participating in a panel discussion, “Reassessing the effectiveness and transmission of monetary policy,” at 2245 SGT. The ECB minutes for the July 18 meeting indicated that the ECB members will approach the governing council meeting on September 12 with an open mind to re-evaluate the level of monetary restriction. The OIS futures see an 86.5% probability for a 25 bps cut in the deposit facility rate to 3.50% at the ECB meeting on September 12, a week before the FOMC meeting. Worries about sticky inflation eased after the Eurozone negotiated wage growth declined significantly to 3.6% YoY in 2Q24 from 4.7% in 1Q24. The Sentix Investor Index fell a second month to -13.9 in August after turning positive for a single month in June, with the present situation hitting a six-month low of -19 and expectations a four-month low at -7.9.
Quote of the day
”The Berlin Wall wasn't the only barrier to fall after the collapse of the Soviet Union and the end of the Cold War. Traditional barriers to the flow of money, trade, people and ideas also fell.”
Fareed Zakaria
23 August in history
In 1990, East and West Germany announced that they would unite on October 3.
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