August 19, 2024

“It’s Jackson Hole week. The annual gathering of central bankers in Wyoming is the biggest opportunity of the year for policymakers to signal the future of monetary policy around the globe, and Powell’s Friday speech could be a pivotal moment for FX.”

Tim Hallinan – Trading Director

Main Headlines

Canada’s two main railroad operators issued lockout notices yesterday to the Teamsters union, which threatens to freeze the country’s freight rail network on Thursday, after last-minute labour deals collapsed. The result could be billions in economic damage and delayed shipments of Canada’s main exports.

After a capacity shock driven by the jailing of those involved in the riots earlier this month, the British government has activated the emergency powers associated with Operation Early Dawn this morning, which gives the courts the ability to hold prisoners in police station cells until prison spaces become available.

GBP

Sterling has recovered strongly over the past week and could threaten to push through its previous year-to-date high at a touch above 1.30. The pound wobbled considerably after the Bank of England decided to cut for the first time in the cycle earlier this month, but a wider rebound in risk appetite, a broad decline in the dollar, and the realisation of the healthiest GDP growth in the G7 in the first half of the year have put sterling back in vogue. This week is largely a build up to Thursday’s PMIs and Governor Bailey’s speech in Jackson Hole on Friday for clues on whether we may get a second rate cut next month. As it stands, the market is looking for one or two more cuts before the end of the year.

EUR

The euro is trading at a year-to-date high this morning after the dollar slipped further at the close of last week. As explained previously, EUR/USD’s venture above 1.10 for the first time since January is a dollar-led move, in spite of the worsened sentiment about eurozone growth. Although fallen out of focus, the French political situation remains a constant weight on the euro in the background, with French-German yield spreads still vastly higher than before the election announcement. That’s on top of a downturn in the PMI indicators and the sentiment surveys, and an unexciting 0.3% rate of growth in Q2. European investors will look to Thursday’s PMIs for some domestically led strength in the euro, if we can get a recovery. Tomorrow’s wage data will also be key for the ECB’s confidence in moving forward in terms of rate cuts.

USD

As the Federal Reserve’s first cut draws closer and the dollar falls below a 7-month low, the focus this week is on central banker communications. The market’s assessment of the recession odds is contracting with each US data point, and last week it was a bumper 1.0% retail sales print, a lower jobless claims figure, and improved consumer sentiment that helped to revive the soft-landing bets. Alongside a cooling in equity volatility and expectations for a swift cutting cycle, this has helped to make investors comfortable with investing outside of the dollar again. Hints from Daly and Goolsbee about near-term rate cuts over the weekend may foreshadow similar signals from Waller today and, in the highlight of this week, Powell’s keynote speech at the Jackson Hole central banker conference on Friday. The consensus here is that he may use the opportunity to more explicitly greenlight a rate cut in September, although policymakers are likely to push back against the notion of a 50bps rate cut.

Markets

US stocks rocketed to their best weekly performance this year last week, with the Dow, S&P 500 and Nasdaq up 2.7%, 3.7%, and 5.0%, respectively. These recent surges come from a lower base, of course, after the S&P declined almost 9% from the year-to-date high touched in mid-July. The positive momentum has carried through into the Asian session this morning.

Main Economic Events (All Times CET)

1:01am: UK Rightmove HPI
3:15pm: Fed’s Waller speaks
4:00pm: US CB Leading Index

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