CAD
Even with Chair Powell’s appearance in Jackson Hole likely to be the key driver for USDCAD ahead of the weekend, we suspect the loonie traders will also be keeping a close eye on domestic developments, with any progress toward resolving the ongoing rails strikes almost certainly front of mind. As we noted earlier in the week, the impact of a short stoppage is likely to be minimal. A longer shut-out, however, could do some serious damage to the Canadian economy. For now, markets are taking a relatively sanguine view of events, with signs of progress towards a resolution seeing USDCAD remain untroubled for now.
USD
After struggling for almost the entire week, Thursday saw the dollar begin to stage a turnaround, helped by commentary from Fed officials. As we have noted previously, market expectations for Fed easing continue to look overly aggressive to us. With that in mind, a bout of commentary that skewed hawkish relative to market pricing always looked likely, especially heading into Jackson Hole. Yesterday saw this begin to play out, with a raft of FOMC members indicating that while US rates will fall in the coming months, that process should be gradual. As we see it, this indicates a clear preference for easing in 25bp increments, rather than moving in bigger jumps. It is also pushback against markets that continue to project at least one 50bp cut before year-end as the base case. Hearing this, the greenback retraced higher as traders began paring their Fed easing bets. This leaves the dollar’s fortunes in the hands of Chair Powell, who is due to speak at 15:00 BST today. If he chooses to echo the tone of his Fed colleagues, and we think he will, then another leg higher for the dollar should be in store later today.
EUR
While it was a busy day for euro traders on Thursday, neither August’s flash PMIs nor Q2 negotiated wage data changed our view of the eurozone economy. In short, growth is weak, despite headline activity indicators being propped up by the Pairs Olympics, with this translating into a continued fall in inflation and wage pressures. Given this, it is unsurprising to see that a September rate cut remains almost fully priced by markets, with 67bps of easing expected for the remainder of the year. It does, however, suggest to us that the euro looks overvalued at current levels. We continue to think short-term risks are skewed towards EURUSD downside, with Chair Powell likely to strike a more hawkish tone than ECB Chief Economist Lane, who also speaks at Jackson Hole tomorrow. Before then, however, inflation expectations are the main eurozone-specific event of note today. A modest further easing looks likely to us, in line with recent trends, an outcome that should maintain downside pressure on the euro ahead of the weekend.
GBP
Although Fed Chair Powell is likely to be the main draw in Jackson Hole, his appearance is followed just one hour later by a speech from BoE Governor Bailey – a setup that should offer plenty to keep GBPUSD traders busy ahead of the weekend. More to the point, we think the two central bank chiefs will contrast sharply in their rhetoric relative to market pricing. Powell is likely to offer pushback against market expectations that project close to 100bp before year-end, while we suspect that Bailey will hint that the 40bp of easing priced in for the BoE is too conservative. If our expectations are met, then GBPUSD downside should be the outcome today, with levels approaching 1.30 potentially coming into play.
This content was originally published by our partners at Monex Canada.