The currency markets are getting ready for significant movement with big events in the next week. Traders are intently looking ahead to Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole economic symposium and this Friday’s July employment report. Forecasters do see the potential for the EUR/USD currency pair to fall as low as 1.15/1.16. This would be the case if the European Union’s economic data continues to widely underperform expectations and if Powell does not budge from his hawkish policy stance.
As for the dollar, it should be well-supported next week, aided by the strong FOMC stance. Traders are nervously watching a big economic release this Friday. It pairs a significant expiration of tariffs with the release of important job growth numbers, therefore resilience is more important than ever. Both variables, though overlapping, are sure to weigh on market sentiment and currency valuations.
Tariff effects are typically considered when looking at leading indicators. We wouldn’t expect to see definitive inflationary signals from them until late this summer, or more specifically July through September. For now, Powell’s steadfast determination to stay the course denotes faith in the durability of the labor market’s ongoing robustness. Though worries born from last year’s inflation miscalculations in 2022, Powell is determined to double down.
Market sentiment is beginning to reflect a September rate cut. According to traders, there’s currently about 14-15 bps worth of this potential priced in. With the month coming to an end, front-end spreads seem to have stabilized. That have really fed into, supported this trend, have supported the U.S. dollar. Powell’s team is already on high alert. They are doing it because they don’t want inflation caused by potential price increases, which are the result of tariff-induced inflation.
During a recent press conference, Powell skillfully resisted calls for a more dovish stance from Fed officials such as Waller and Bowman. His resolve suggests that he aims to project calmness and deliberation in the face of potentially weakening data, rather than appearing reactive or panicked.
The economic conditions today are in no way similar to the wage-price spiral we saw back in 2021. Market analysts have characterized these recent movements as a short-term sticker shock. They think this is reflected in some re-pricing and headline transitory foam. As a consequence, job creation is still very strong, thus a rate cut on July 30 seems more and more unlikely.
The market sentiment has changed profoundly. In response, investors are shunning safe-haven currencies, like the dollar and euro, and buying up currencies closely tied to growth prospects. Proactively capitalizing on opportunities, increasing economic conditions and policies have created a tremendous opportunity for traders. The Australian dollar (AUD), Canadian dollar (CAD), and a select few emerging market currencies in Asia are starting to pick up steam.