Written by Convera’s Market Insights team
Fed cuts are coming until proven otherwise
Boris Kovacevic – Global Macro Strategist
Investors continue to favor equities and are taking the opportunity of stabilizing bond yields to rotate capital into stock markets before Jackson Hole. The S&P 500 rose for an eight day and is now on its longest winning streak of the year, after having recorded its best week in 2024 so far. The US dollar entered the trading session against the backdrop of continued selling pressure and is on track to fall for a fifth straight week.
The totality of the data continues to add to policy makers confidence to lower interest rates to a more neutral level. Inflation is easing and the labor market is cooling off. Both have been welcomed by investors as the pace has been fast enough to justify rate cuts without raising recession risks materially.
Regarding the FOMC meeting in September, the question has shifted from asking if the Fed will cut rates to how much they are willing to cut. The recent macro data favors a 25 basis point over a half-point rate cut. This assumption will need verbal confirmation from Fed Chair Jerome Powell to convince investors fully and to strengthen the conviction for higher equity prices going forward. The next opportunity to do just that will be his scheduled speech during the Jackson Hole Symposium on Friday.
It is important to remember that the upcoming meeting in four weeks will be accompanied by the Summary of Economic Projections (SEP). The FOMC will likely revise down its June dot-plot for 2024 from one to two or even three rate cuts. The magnitude of the revision is expected to depend on the next job report due September 6th. Since the unemployment rate has started picking up, labor market data has replaced inflation figures as the main volatility catalyst and Fed pricing determinant.
Sterling on track to retest July peak
Ruta Prieskienyte – Lead FX Strategist
The British pound strengthened to a one-month high above $1.299, as sterling continues to benefit from the US dollar’s bearish outlook, particularly given its robust performance this year. GBP is currently up approximately 2.0% year-to-date against the Greenback, making it the biggest winner among the G10 currencies. It now appears poised to retest the year’s high of $1.3045 as broad dollar weakness dominates global FX markets.
Support for the pound stems from rate differentials and an improving economic outlook for the UK. Market expectations suggest that the Bank of England will adopt a more gradual approach to interest-rate cuts compared to the Federal Reserve. Even though the BoE may begin its easing cycle ahead of the Fed, markets are pricing in over 90 basis points of easing from the Fed by year-end, compared to around 40 basis points from the BoE.
This week, attention turns to the Fed’s Jackson Hole Symposium, where Jerome Powell and Bank of England Governor Andrew Bailey are scheduled to speak on Friday. In terms of data releases, investors are awaiting PMI readings and the GfK Consumer Confidence survey. While this week’s PMIs will be significant, the near-term outlook hinges largely on what Powell says at the conference on Friday.
CAD advances ahead of Canadian inflation
Ruta Prieskienyte – Lead FX Strategist
The Canadian dollar advanced to a fresh one-month high against the US dollar ahead of this week’s major events, including today’s Canadian consumer inflation report and the Federal Reserve’s Jackson Hole Symposium, which starts on Thursday. Market consensus expects inflation to have fallen to between 2.4% and 2.7% in July, and if these expectations are met, it could solidify the case for a Bank of Canada rate cut in September. The central bank is anticipated to cut its policy rates three more times this year, with 72 basis points priced into the OIS curve by year-end.
The annual Kansas City Fed’s Jackson Hole Symposium kicks off on Thursday, with all eyes on Fed Chair Jerome Powell’s keynote address. This event has been the setting for several major Fed policy announcements in the past, which is why it garners so much attention. However, historical analysis suggests the event has typically been hawkish, potentially posing a headwind for the Canadian dollar. Elsewhere, attention may also turn to the Democratic National Convention in Chicago, where Kamala Harris is set to be officially named the Democratic presidential candidate on Thursday.
The FX options market suggests momentum may favour the Canadian dollar. While gauges of one-month and longer remain in favour of USD/CAD calls, the one-week gauge has seen a sharp bearish repricing recently and is now the most CAD bullish in five months.
Stock kick off the week in green
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: August 19-23
All times are in BST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
