Powell pummels the dollar
It only took a few words on interest rates from Fed Chair Powell on Friday – that the time has come to lower them – to send the dollar into a tailspin, with the US currency shedding the best part of 1% against the euro and sterling by the close of business. EURUSD and GBPUSD are trading at around $1.1180 and $1.3200 this morning – the former its highest level in almost two years, the latter its highest level since March 2022 – while EURGBP is trading at about £0.8470 having edged down over the course of last week. It remains to be seen whether the dollar continues to slide in the near-term, or instead consolidates for a while following its sizeable decline over the past couple of weeks.
US government bond yields headed south post Powell’s comments, which copper-fastened the markets’ expectation for a 25bps Fed rate cut next month and saw it price in a bit more in terms of cuts by the end of this year (almost 100bps in total is now expected). Equity markets rallied, not surprisingly, with the S&P 500 adding just over 1% and European stocks closing around 0.5% higher on the day.
In his remarks to the Jackson Hole central banking symposium, Powell said that “upside risks to inflation have diminished (but) downside risks to employment have increased (hence) the time has come for (monetary) policy to adjust”. He added that “the direction of travel (for interest rates) is clear”, with the “timing and pace of rate cuts” dependent on “incoming data (and) the evolving outlook”. He said the Fed will “do everything we can to support a strong labour market”, noting that the current level of interest rates “gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labour market conditions.”
ECB Chief Economist Philip Lane and Bank of England (BoE) Governor Andrew Bailey also spoke at the same event on Friday. While Lane said the return of Euro area inflation to the 2% target “is not yet secure”, he also warned that keeping interest rates “too high for too long” runs the risk of inflation undershooting target in the medium-term, suggesting the ECB will continue to gradually lower rates with a 25bps cut likely next month (as the market expects). Similarly, Bailey said inflation in the UK has not yet got “back to target on a sustained basis (hence) policy will need to remain restrictive for sufficiently long” to ensure it does. That won’t prevent the BoE from lowering rates, as this month’s rate cut showed, though the market is probably correct in not expecting the next move until the next but one meeting in November.
Powell’s remarks on Friday will continue to set the tone in markets over the week ahead, which is relatively light in terms of economic data although there are two important releases – flash CPI inflation for August in the Euro area and PCE inflation for July in the US – scheduled for Friday.