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Aug 22 - 04:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Probes July Lows In Case Powell Echoes Barkin

By Randolph Donney  —  Aug 22 - 02:50 PM

The dollar index rose 0.24%, led by a 0.36% EUR/USD loss that put the euro on the brink of breaking well below July's pivotal lows, which could occur if Fed Chair Jerome Powell's speech at Jackson Hole on Friday echoes hawkish comments from Richmond Fed president Thomas Barkin.

Despite Tuesday's weaker than forecast existing homes sales and Philly Fed data, which may have helped pull 10-year Treasury yield off fresh post-GFC highs, 2-year bund-Treasury yield spreads fell to new 2023 lows.

That drop came as the Treasury curve inverted further after tantalizingly high 10-year yield attracted buyers and some short-covering.
But also as the comments from Barkin, who is generally viewed as dovish, raised the risk that Powell too might comment on relative U.S. economic strength and emphasize the need to achieve the Fed's 2% inflation mandate.

If the Fed keeps rates high, or higher, for longer this should reduce inflation risk.

The question then becomes whether the U.S. R-star rate -- the equilibrium rate consistent with potential growth and stable, on-target 2% inflation -- is higher than before the pandemic, raising the neutral level for Fed rates.
This could be part of the discussion at Jackson Hole.

Also part of the discussion is what the implications are from China's economic woes.
Jens Eskelund, the President of European Chamber of Commerce in China, on Tuesday said China needed to urgently address economic uncertainty.

Though the Fed sees a tight labor market and above forecast economic growth as reasons not to reverse policy, S&P joined Moody's earlier downgrading of some U.S. banks.

High-yielding money market fund inflows are reducing bank deposits, as bank asset values fall as yields rise.
Thus the market pricing in nearly 100bp of Fed rate cuts next year as the fastest rise in rates in four decades sets in.

USD/JPY fell 0.25% after earlier nearing Monday's highs and August's 2023 peak nearby at 146.565.
The pullback came as Treasury yields retreated from their highs.

Sterling fell 0.13%, weighed down by the fastest fall in factory output in almost 3 years, the broader dollar rebound from Barkin and pullback in equities.

USD/CNH rose 0.22% versus USD/CNY's 0.09% gain, as China tries to fend off the yuan's slide.

Looking ahead the focus is on Wednesday's global PMIs then Friday's Powell presentation.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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