Last week, Fed speaker and president Daly rallied the dollar with her bullish comments regarding inflation, saying, “our work is far from done yet”. She was unequivocal that although rate hikes may slow or even pause if/when inflation begins to fall, they would not start cutting rates so soon after hiking them. This may signal that a Central bank-induced recession is almost guaranteed for businesses, and many expect earnings and hiring to take a hit in 2023 as rate hikes stick.
Markets will be watching this Friday intently for Fed Chairman Jerome Powell Jackson Hole’s speech to see if he echos the same hawkish tones as Daly. If he does, markets may go on a USD buying spree leaving other majors like the EUR firmly in bearish territory.
Euro is trading below parity, with the dollar wiping out all its gains and momentum from the previous week. Much of Europe is on holiday, as is the tradition in August, which means low liquidity and, in turn, knee-jerk reaction to the news from the USA. Energy concerns remain the biggest threat to the single currency as Germany announced it might turn to nuclear power to secure its energy supply in the face of Russian hostility. However, the worst is yet to come when winter kicks in and markets are yet to price this in. Many investors will focus on Tuesdays Services PMI data and the consumer confidence reading.
In the UK, inflation officially hit a whopping 10.1%, but many believe the actual rate is much higher. The increase has already changed consumer spending behaviour. As in Europe, the worst is yet to come in winter when the energy price cap is lifted with consumer confidence at its lowest level since the 2008 financial crisis. Despite six consecutive interest rate rises from the BOE, the currency is still falling against the dollar. More worryingly, as Liz Truss is likely to take up the role of PM, her tax-cutting policy has been called the ‘greatest risk’ to the UK but CitiGroup. Of course, it could be worse. Turkey is currently contending with 80% inflation.
What to watch this week:
Tue
EUR Flash Manufacturing & Services PMI
GBP Flash Manufacturing & Services PMI
USD Flash Manufacturing & Services PMI
EUR Consumer Confidence
Thu Aug 25
Jackson Hole Symposium
USD Preliminary GDP
Fri Aug 26
Jackson Hole Symposium – Jerome Powell Speech