Activity data will now be key – ING

Fed Chairman Jerome Powell used his speech at the Jackson Hole Symposium to pre-announce the start of the Fed’s easing cycle in September. Short-term US rates fell about 15bps in Monday’s session, and the DXY dollar index sold off about 1%. In effect, Powell declared that the fight against inflation has been won, with attention now turning squarely to the US labor market. The latter was very important in Powell’s speech, notes Chris Turner, FX strategist at ING.

A US soft landing comes at a price

“Remarkably, the price of US one-month OIS rates two years ago remains at a low of 3.00%. This pricing seems consistent with a soft landing and assumes some order – perhaps 25bp per meeting – Fed rate cuts by the fall of 2025. Probably close to 100, DXY prices in this scenario and for DXY to fall convincing below 100, fears of a recession in the US will have to build. And in the midst of all this, we have an election in the US in early November.”

“Therefore, much lower USD levels here call for much weaker US activity data, where attention will focus on the September 6 August jobs report. This week we see some secondary US activity data in the form of consumer confidence (Tuesday and Friday), plus weekly initial claims data (Thursday) and personal income and spending data (Friday). Given Powell’s speech on Friday, the release of the core PCE deflator probably now has a less critical role.”

“We note that the USD is at some significant medium-term support levels. We don’t think it needs to go much higher from here, but equally, the catalyst for a major downside breakout may not be present this week. DXY appears to be consolidating in a 100.50-101.90 range for now.”