By Michael Lucas
Since Fed Chair Kevin Warsh’s Jackson Hole debut on August 28, markets have shifted to pricing-in a US Federal Reserve rate rise on September 16, as more likely than not — a sharp turn from the rate-cut expectations that had dominated earlier in the year. That single repricing is the thread running through almost every major pair this week, alongside a packed central bank calendar: the RBNZ and Bank of Canada both met Wednesday, and the ECB and Fed both meet in the next two weeks.
The Dollar started the week firm, but has since softened after Fed Governor Christopher Waller pushed back on aggressive hike bets, and the Euro has been the main beneficiary, edging higher against the Greenback on Thursday.
The Euro firmed against the Dollar on Thursday, after Waller’s dovish-leaning remarks, though it remains the “wait and see” currency of the week — the ECB doesn’t meet until September 10, a full week after the Fed’s rivals have already moved.
The Dollar’s direction now hinges almost entirely on today’s non-farm payrolls report. A soft print would cool September hike bets and pull the Dollar back down; a strong labour market reading keeps the hike case alive and supports further USD strength. Waller’s comments on Thursday have already taken some heat out of the rally, with the Dollar index easing modestly across the board.
BOE’s Governor Bailey is speaking this morning at the London School of Economics about the central bank’s efforts to control inflation and prevent financial crises. Expect his comments to be closely scrutinised for any clues of future monetary policy.
Next week, expect a quieter stretch as markets digest Friday’s jobs data and position ahead of the ECB decision. This is the next headline event for the Euro. Eurozone inflation has been running near 2.9%, which keeps a hike on the table. A hawkish ECB would be very supportive of the Euro, and compress the 150 basis point advantage that the Pound currently has over the Euro. This has been GBP’s main pillar of strength and is key to it’s future movements.
Regarding the commodity currencies: AUD and NZD will likely be trading on broader risk sentiment and any follow-through from this week’s RBNZ and Australian GDP releases, since neither currency has a major domestic catalyst of its own next week. CAD will stay sensitive to oil prices after the Bank of Canada’s Wednesday interest rate hold.