Fed Chairman Powell was short and sweet after the annual international meeting of central bankers in Jackson Hole: the message was very clearly 'hawkish'. Still, currency markets seemed to have already priced in this development, as the reaction was fairly muted.
Compared to the previous week's rates, all G10 currencies have now moved less than 1%. In fact, the prices of many emerging market currencies have risen, with the Chilean peso and Latin American currencies in general leading the way. Even the euro, despite the exploding power markets in Europe, has more or less found a foothold at parity level. ECB representatives made unusually hawkish statements about the need to get inflation under control.
Some were talking about a giant jump of 75 basis points at the September meeting. This currently ensures that the exchange rate of the single currency does not fall further. Traders remain keen on the highly volatile gas and electricity prices in Europe. These have already led to emergency declarations by EU representatives, which talk about
Price caps and rationing.
In the coming days, it will be known exactly how the plan works. We expect this to determine the movements in the market. On Wednesday, we will get the inflation data from the Eurozone and the Chinese PMIs, and on Friday the US labour market report. These figures will provide an up-to-date insight into the global trade-off between inflation and economic growth. Below are the main currencies in detail.
Euro
The PMI indicators for economic activity were weaker than expected. They now point to a slight contraction in economic activity. In the natural gas and power markets, new price records are being set again and again, fuelled by fears of gas shortages. At the time of writing, the EU has announced measures that effectively amount to rationing in these markets.
The ECB has other concerns: it is preparing markets for a large, long-term rate hike, which could start in September with a giant 75 basis point move. The euro continues to fluctuate around parity, under the downward pressure of a looming recession but strengthened by the narrowing gap between European and US interest rates. Everyone is now looking forward to the August flash inflation report, due on Wednesday. The pressure on the ECB will not ease, as both the headline figure and – more worryingly – the headline figure are expected to be the highest in decades again.
British Pound
The UK economy – as in the economies of most other G10 countries – has seen a sharp divergence between the resilient services sector, which is supported by full employment and the good financial position of households, and the ailing manufacturing sector, which has been damaged by massive increases in energy prices and ongoing supply chain issues.
The economy is not currently in recession and the Bank of England is fully focused on curbing inflation. The UK is now the second G10 economy (after New Zealand) for which markets expect the overnight interest rate to be around 4%. This should support the British pound in the medium term, although markets are focused on the negative for the time being. There is no major economic news or policy news on the agenda this week, so the pound rate is likely to follow the EUR/USD rate closely.
U.S. Dollar
The dichotomy between business confidence and the strength of the labour market was also evident in the US last week. The PMI indicators have been lousy, but the number of weekly jobless claims remains very low and shows how strong the labour market is. Chairman Powell got straight to the point in his brief speech in Jackson Hole: the Federal Reserve continues to focus all its attention on inflation, despite initial signs that it is leveling off. This week, the August jobs report will be decisive. Once again, job growth is expected to be excellent, the labor market is still at or above full employment, and wages have risen sharply (but have not yet been able to keep up with headline inflation). In the meantime, interest rates are being adjusted further and further upwards and, as for the UK and New Zealand, it can still be priced in that the Federal Reserve will eventually raise interest rates in the US to more than 4%.
