Americas FX news wrap 25 Aug: Powell/Fed prepared to raise rates but carefully

Americas FX news wrap 25 Aug: Powell/Fed prepared to raise rates but carefully

Forex news for North American trading on Aug 25, 2023

Forex news for North American trading on Aug 25, 2023Chairman Powell delivered his anticipated speech at Jackson Hole, and in contrast to last year’s concise and straightforward address, this time he provided a diverse range of insights that catered to various perspectives.

Regarding monetary policy and rate decisions:

  • Ready to increase rates more if deemed essential.
  • Subsequent steps will hinge on the available data.
  • The Federal Reserve will adopt a cautious approach in determining whether to proceed with rate hikes or sustain the current levels.
  • Given the prevailing economic uncertainty, there is a need for flexible and adaptive monetary policy decision-making.

On economic observations:

  • Inflation continues to surpass the desired levels, with two consecutive months of favorable data marking just the initial phase. Building confidence in the trajectory of inflation demands a more sustained trend.
  • Presently, the policy leans towards restraint, although determining the precise neutral rate level remains ambiguous.
  • Reaffirming its stance, the Federal Reserve maintains its unwavering commitment to achieving a 2% inflation target.
  • A potential reduction in inflation might necessitate a gentler labor market stance.
  • Should indicators indicate that the labor market is not losing steam, it could prompt further interventions from the Federal Reserve.
  • Indications suggest that inflation is becoming increasingly influenced by labor market dynamics.

Unique Economic Dynamics:

  • The current economic cycle has brought about distinctive impacts on inflation and labor market dynamics due to supply and demand imbalances.
  • A noticeable decrease in job vacancies has occurred without a simultaneous increase in unemployment, underscoring a substantial demand for workforce.
  • In comparison to recent decades, it is evident that inflation is displaying heightened responsiveness to the prevailing conditions in the labor market.

Conclusion and Outlook:

  • The Federal Reserve is skillfully steering through a landscape of economic uncertainty.
  • Given the prevailing uncertainties, adept risk-management has assumed paramount importance.
  • Subsequent determinations in forthcoming sessions will stem from a thorough evaluation of data, future prospects, and associated uncertainties.
  • Central to its mission is the restoration of price stability, an indispensable component in realizing the dual objectives of fostering robust labor market conditions and maintaining price equilibrium.
  • The Federal Reserve remains resolutely dedicated to persisting in its endeavors until these objectives are successfully attained

Other Fed members who spoke today included Fed Harker:

  • Expectations lean towards the possibility of rate cuts emerging at some juncture in the upcoming year.
  • He emphasized once again his conviction that there is presently no requirement for further rate increases.

Federal Reserve’s Goolsbee, known for his dovish stance, also addressed the audience today, adopting a slightly more cautious tone in his remarks:

Remains steadfast in the belief of successfully achieving a smooth transition to a soft landing.

Expresses the view that there exists a considerable distance to traverse concerning inflation.

While the 3% inflation registered a decline, this was primarily attributed to energy factors, which possess the potential to rebound.

Remarkably, consumer expenditure has not exhibited the anticipated decline despite the concurrent rise in yields.

Displays patience in the pursuit of attaining the 2% target.

Market Reaction:

The market’s initial response led to a minor decline in the dollar, potentially influenced by the term ‘carefully’, a characterization that could be interpreted as dovish. Subsequently, the dollar made a rebound, although it later retraced from its peak, ultimately concluding the session on an upward trajectory.

The probability of a September rate hike continues to hover at approximately 20%, while the likelihood of a November hike has once again risen beyond the 50% mark.

As the day concludes, the US dollar emerges as the most robust among the major currencies, although the advancements remain relatively moderate. Notably, the USDJPY pair exhibited the most significant movement, witnessing a 0.40% ascent in the USD. The subsequent notable USD gain occurred against the NZD, with an appreciation of 0.25%. Conversely, the USDCHF pairing saw minimal fluctuation, leaving the dollar almost unaltered.

At the close of the day, US interest rates reveal a blend of outcomes. The shorter end of the spectrum exhibits an increase, as evidenced by the two-year yield concluding the week above 5% at 5.0779, marking a rise of 5.9 basis points on the day. In contrast, the 10-year yield experiences a marginal decline of -0.4 basis points, settling at 4.231%.

Throughout the trading week, a consistent trend persisted: the 2-year yield demonstrated an upward trajectory, while yields at the longer end experienced a decline.

  • 2-year yield rose 12.7 basis points
  • 5-year yield rose 4.9 basis points
  • 10-year yield fell -2.6 basis points
  • 30-year yield fell 10 basis points

Volatility marked the trajectory of US stocks during the day’s trading. Leading the way was the NASDAQ index, which rebounded energetically from its previous decline. The index saw a dip of -87.63 points at its lowest point today, only to rally and surge by 169.45 points at its peak. The S&P and Dow Industrial Average also displayed akin fluctuation, experiencing alternating upward and downward movements throughout the trading session.

The final numbers are showing:

  • Dow industrial average rose 247.48 points or 0.73% at 34346.91
  • S&P index rose 29.40 points or 0.67% at 4405.72
  • NASDAQ index rose 126.66 points or 0.94% at 13590.64

For the trading week:

  • Dow industrial average fell -0.45%
  • S&P index rose 0.82%
  • NASDAQ index rose 2.26%

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