Written by Convera’s Market Insights team
Powell confirms outlook is now “balanced”
The US dollar was lower on Friday as US Federal Reserve chair Jerome Powell restated his view that the economic risks for the US were now “balanced”.
In a key speech on Friday, Powell said that with US inflation cooling the US central bank now needs to be aware of the risk of overtightening and slowing the US economy more than necessary. This is a clear shift from the dominant message in place over the last 18 months where the Fed signalled that controlling inflation – by raising US interest rates – was the primary focus.
The US dollar had seen a two-day mini-rally on Wednesday and Thursday last week – boosted by solid economic data – but Powell’s commentary quickly saw the greenback give back recent gains.
The Australian dollar led the rally with the AUD/USD up 1.0%. The GBP/USD gained 0.6%.
The euro underperformed, with the EUR/USD down 0.1%, after last week’s big drop in European inflation.
In Asia, the USD/JPY tumbled, down 0.9%, while the USD/CNH fell 0.3%.
Inflation key for USD outlook
What could drive a US dollar rebound? As a result of pricing in five Fed cuts in 2024 and sending the USD sharply lower over the last month, the markets are pushing themselves into late-cycle positions that might be too aggressive.
Following the remarks of Fed Governor Christopher Waller, several 2024 FOMC participants, like as Thomas Barkin of the Richmond Fed and Mary Daly of the San Francisco Fed, tried to project a more cautious tone in an effort to counteract the too positive outlook.
Growth in the US is still robust fundamentally. If inflation doesn’t continue quickly back to 2.0%, US interest rates might need to stay higher for longer.
RBA, US jobs due
Looking to the week ahead, the early focus will be on the Reserve Bank of Australia decision.
After last week’s lower than expected retail sales and inflation readings, expectations for a rate hike have tumbled, with the market now seeing only a 4.0% chance of a 25-basis point hike on Tuesday (source: Refintiv).
Australian GDP and a policy decision from the Bank of Canada are due mid-week.
On Friday, all eyes will be on the US non-farm payrolls report. After a lower than expected result in November, another weaker number will add to expectations that the US Federal Reserve is well and truly on hold.
Aussie at four-month highs ahead of RBA
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 4 – 9 December
All times AEDT
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*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.
