Goldman with its post J-Hole take for forex.
USD: Cautiously is still a hard bar to beat. Fed Chair Powell’s speech at Jackson Hole this year delivered the same message from July that incoming data will determine the next rate decisions.
As we expected, Powell’s speech was balanced (especially relative to the warning of “some pain” last year) and reiterated the FOMC’s focus on achieving price stability “until the job is done.” He offset some hawkish remarks—i.e., marginally greater focus on the recent strength in US activity data, flagging the risks that “persistently above-trend growth” and “evidence that the tightness in the labor market is no longer easing” could warrant additional tightening—with a continued characterization of policy as “restrictive,” noting that “real interest rates are now positive and well above mainstream estimates of the neutral policy rate,” as well as an emphasis on the fact that the FOMC will “proceed carefully” as it deliberates the need for additional hikes.
While the policy outlook discussion was less solely focused on the inflation picture than it has been recently, the comments overall still looked consistent with our economists’ current baseline of no hike in September (and an eventual decision that further policy tightening is unnecessary).
That said, given the increased focus on the growth data, any upside surprises in next week’s key releases (especially the NFP report, but also JOLTS and ISM manufacturing) could push September pricing higher—in addition to any beat on PCE inflation on August 31 or CPI inflation on September 13.
Moreover, we have been stressing that substantial Dollar downside will likely require better growth in Europe and China alongside continued disinflation pressures in the US, and the path to that combination has been narrowing again (Exhibit 1).
Though President Lagarde reiterated the risk of more persistent inflation, her speech was nearly exclusively focused on longer-term policy issues and therefore offered little for markets—though next week’s Euro area inflation report will be key.
Interesting that DXY led interest rate spreads in the 2022 rally but has lagged in 2023. I’d suggest this is a function of the market being caught off guard because it was too long the CNY/EUR recovery.
I see nothing on the horizon to change the CNY/EUR recovery disappointment.
If the spreads were to soften because the US slows as well then I’d expect DXY is rise with a safe haven pulse.
The AUD bear market is not over.
