The most recent US data has not provided a clear argument for a 50 basis points Federal Reserve rate cut in September. Many members of the Federal Open Market Committee (FOMC) have also expressed some reluctance towards this prospect in recent comments. Despite this, US services S&P Global PMIs came in stronger than expected, offsetting a decline in manufacturing. Additionally, initial jobless claims only rose slightly to 232k, in line with expectations. Continuing claims, a measure of the difficulty of re-entering the workforce, were lower than expected and revised downwards for the previous week, according to ING’s FX strategist Francesco Pesole.
All eyes are now on the upcoming Jackson Hole symposium, where Fed Chair Jerome Powell is set to speak today. The latest payroll revisions suggest that the job market is weakening from a lower starting point, but other indicators relating to activity and jobs are not significantly concerning. Powell is expected to use his speech to prepare the markets for a potential rate cut in September. However, given the current market pricing, there may not be much of an incentive to hint at a 50 basis points move at this stage. The market already expects a total of 100 basis points rate cut over the next three meetings, and any indication of a more aggressive cut could drive Fed funds futures curve uncomfortably low.
The risks for the US dollar are slightly tilted towards the upside today. However, it is not expected that Powell’s speech will have a significant and lasting impact on the foreign exchange market. In the near term, there is a bearish bias on the USD as the rebuilding of speculative positions following recent rebalancing is more likely to favor dollar shorts. Overall, Powell is likely to re-emphasize the importance of focusing on both sides of the mandate in his speech, maintaining a balanced approach to monetary policy.
In conclusion, the latest US data and comments from FOMC members do not strongly support a 50 basis points rate cut in September. Powell is expected to use his speech at the Jackson Hole symposium to prepare markets for a potential rate cut next month. However, given current market expectations, there may not be much incentive to hint at a more aggressive cut at this stage. The risks for the USD are slightly tilted towards the upside, but the overall bias remains bearish in the near term. Powell’s speech is not expected to have a significant impact on the foreign exchange market, with the focus likely remaining on the balanced approach to monetary policy.
