Market Comment – Dollar trades mixed, awaiting Powell’s speech; Euro slides on PMIs
August 23, 2023 9:27 am
Dollar trades mixed as Jackson Hole draws closer
Fed’s Barkin sees reacceleration scenario
Euro falls on PMIs, UK PMIs next
Wall Street turns spotlight to Nvidia earnings
Fed’s Barkin adds to the likelihood of more Fed hikes
The US dollar traded mixed against the other major currencies on Tuesday as traders may be reluctant to assume large positions ahead of the Jackson Hole economic symposium and Fed Chair Powell’s speech on Friday.
With the Fed turning data dependent and US economic indicators coming in more than encouraging since the Committee last met, investors may be expecting Powell to tilt the scale towards another hike before the end credits of this tightening crusade roll.
Comments by Richmond Fed President Thomas Barkin added some credence to that view as the policymaker said that the Fed must be open to the possibility of the economy reaccelerating rather than slowing, a scenario that was not on the table three or four months ago. That includes the possibility of inflation staying high, he added.
From believing that the Fed has already ended its own hiking cycle at the last gathering, market participants are now seeing a nearly 45% probability for another hike by November, while they have scaled back a decent amount of basis points worth of rate cuts that were expected through 2024. If Powell indeed sounds more hawkish than he did at the last Fed meeting, investors will likely further raise their implied rate path, which could add more fuel to the engines of the US dollar and Treasury yields.
The probability of Powell appearing hawkish could increase if the preliminary US PMIs for August, scheduled for later today, enter the basket of data pointing to a robust economy.
Euro slides on disappointing PMIs, UK business surveys awaited
The euro was yesterday’s main loser, perhaps due to traders’ concerns ahead of today’s preliminary PMIs, and their fears were proven right. Despite the improvement in the manufacturing index, the services one dropped below the boom-or-bust zone of 50, pushing the composite PMI down to 47.0 from 48.6.
The euro fell to a new low against its US counterpart, breaking below the key support zone of 1.0830 as market participants are now assigning only a 50% probability for one last hike by the ECB at the September gathering.
The UK PMIs are also expected to have declined, but with UK wage growth accelerating notably and the core CPI rate staying stubbornly close to 7%, it is hard to imagine that the BoE will stop raising rates soon.
The pound could also slide in case of a disappointment, but with traders anticipating three more quarter-point increments by the BoE, sterling could continue outperforming the euro and euro/pound could eventually break its one-year low of 0.8500, hit on July 11.
Elsewhere, China’s central bank set once again the official midpoint for the yuan around 1000 pips higher than Reuters’ estimate. The aussie and kiwi remained in a recovery mode, but unless Beijing steps up its efforts to support a wounded economy, those recoveries are likely to stay short-lived, especially if Powell appears in his hawkish suit at Jackson Hole.
Nvidia takes center stage
The S&P 500 and the Dow Jones ended Tuesday’s session slightly lower, with the Nasdaq recording minor gains. Apart from Fed Chair Powell’s speech at Jackson Hole on Friday, equity investors are also eagerly awaiting earnings results from tech giant Nvidia, one of the main drivers behind the latest rally in Wall Street. The results will be released today after the closing bell.
Nvidia surprised market participants in May with its strong projections, adding more fuel to its own rally and to the steep uptrends of other tech stocks as it further bolstered the artificial intelligence euphoria. Investors are expecting the semiconductor giant to report another round of stellar results, which could take Nvidia’s share price to new record highs.
However, with the hype towards Nvidia rising exponentially, the risks surrounding today’s announcement may be asymmetrical. Any metric missing analysts’ forecasts could lead to huge disappointment and thereby a sizable fall in the stock.
Fed’s Barkin adds to the likelihood of more Fed hikes
The US dollar traded mixed against the other major currencies on Tuesday as traders may be reluctant to assume large positions ahead of the Jackson Hole economic symposium and Fed Chair Powell’s speech on Friday.
With the Fed turning data dependent and US economic indicators coming in more than encouraging since the Committee last met, investors may be expecting Powell to tilt the scale towards another hike before the end credits of this tightening crusade roll.
Comments by Richmond Fed President Thomas Barkin added some credence to that view as the policymaker said that the Fed must be open to the possibility of the economy reaccelerating rather than slowing, a scenario that was not on the table three or four months ago. That includes the possibility of inflation staying high, he added.
From believing that the Fed has already ended its own hiking cycle at the last gathering, market participants are now seeing a nearly 45% probability for another hike by November, while they have scaled back a decent amount of basis points worth of rate cuts that were expected through 2024. If Powell indeed sounds more hawkish than he did at the last Fed meeting, investors will likely further raise their implied rate path, which could add more fuel to the engines of the US dollar and Treasury yields.
The probability of Powell appearing hawkish could increase if the preliminary US PMIs for August, scheduled for later today, enter the basket of data pointing to a robust economy.
Euro slides on disappointing PMIs, UK business surveys awaited
The euro was yesterday’s main loser, perhaps due to traders’ concerns ahead of today’s preliminary PMIs, and their fears were proven right. Despite the improvement in the manufacturing index, the services one dropped below the boom-or-bust zone of 50, pushing the composite PMI down to 47.0 from 48.6.
The euro fell to a new low against its US counterpart, breaking below the key support zone of 1.0830 as market participants are now assigning only a 50% probability for one last hike by the ECB at the September gathering.
The UK PMIs are also expected to have declined, but with UK wage growth accelerating notably and the core CPI rate staying stubbornly close to 7%, it is hard to imagine that the BoE will stop raising rates soon.
The pound could also slide in case of a disappointment, but with traders anticipating three more quarter-point increments by the BoE, sterling could continue outperforming the euro and euro/pound could eventually break its one-year low of 0.8500, hit on July 11.
Elsewhere, China’s central bank set once again the official midpoint for the yuan around 1000 pips higher than Reuters’ estimate. The aussie and kiwi remained in a recovery mode, but unless Beijing steps up its efforts to support a wounded economy, those recoveries are likely to stay short-lived, especially if Powell appears in his hawkish suit at Jackson Hole.
Nvidia takes center stage
The S&P 500 and the Dow Jones ended Tuesday’s session slightly lower, with the Nasdaq recording minor gains. Apart from Fed Chair Powell’s speech at Jackson Hole on Friday, equity investors are also eagerly awaiting earnings results from tech giant Nvidia, one of the main drivers behind the latest rally in Wall Street. The results will be released today after the closing bell.
Nvidia surprised market participants in May with its strong projections, adding more fuel to its own rally and to the steep uptrends of other tech stocks as it further bolstered the artificial intelligence euphoria. Investors are expecting the semiconductor giant to report another round of stellar results, which could take Nvidia’s share price to new record highs.
However, with the hype towards Nvidia rising exponentially, the risks surrounding today’s announcement may be asymmetrical. Any metric missing analysts’ forecasts could lead to huge disappointment and thereby a sizable fall in the stock.
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