The U.S. dollar (USD) is experiencing a slight bounce as traders look ahead to Friday’s inflation data. The tenor of the dollar overall is clearly consolidative. The U.S. Dollar Index (DXY) continues to be very strong. It still manages to be holding, comparable to the levels we witnessed during the second half of last week. Market expectations are running high as traders look ahead to U.S. inflation, the next key economic data point that could shift the market’s expectations of the Fed’s next moves. Next up CPI, PPI, import prices, and retail sales.
This week represented an exciting, formative moment in U.S. economic reporting. Analysts anticipate that both headline and core inflation will increase for July. There were no important data points released this morning from either the U.S. or Canada. As a result, investors are now getting ready for each report to forecast what will happen with Federal Reserve monetary policy. The expectations for these data points are especially acute given the continued drumbeat of pressure on the Fed to start cutting interest rates.
Writing recently on the effects of today’s market dynamics, Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret expressed their concern that…
“Focus on price reports may be providing the USD with a little lift, absent any other news, but the overall dollar tone remains one of consolidation as the DXY holds close to the levels that prevailed through the latter part of last week.” – Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret
Market watchers are especially focused on how the future data will be used going forward to adjust rate expectations. Swaps markets are currently expecting 21-22 basis points of easing. This expectation is effectively priced into the curve for the September Federal Open Market Committee (FOMC) meeting. As some of this is unwound, this sentiment reflects some traders’ expectations of a pivot in monetary policy after September’s release of consumer and producer price indexes.
The annual Jackson Hole Economic Symposium is scheduled for the end of next week. Market participants—whether public, private or nonprofit—will find this event to be a key inflection point. This year’s symposium will take a close look at transitioning labor markets. Attendees will hear lively conversations on the politics of Federal Reserve policy.
“Swaps reflect 21/22 bps of easing priced into the curve for the September FOMC. Beyond this week’s data, the Jackson Hole event late next week is likely to become a bigger focus for markets. This year’s event focuses on labour markets in transition and, over the years, the gathering has developed a reputation as a stage for unveiling Fed policy pivots.” – Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret
During last year’s Jackson Hole powwow, Fed Chair Jerome Powell signaled that the time had come to begin lowering rates. That hawkish talk contributed to 50 basis point cut coming at the FOMC meeting in September. This history underlies much of our present discourse. Traders are clearly speculating on potentially significant policy shifts based on the next week’s economic data.