In our last article, we expected the DXY to rally but it sold off hard to the downside, we are deeply oversold and the risk to reward on USD longs is excellent in our view. We are looking for the bearish sentiment to peak today and the main event of the day is Fed Chair Powells speech at Jackson Hole...
Jackson Hole to See Peak in USD Bearish Sentiment?
We have Chair Powell speaking today at Jackson Hole and the market is looking for him to indicate rate cuts coming from September. There will be a cut but how big will it be? Markets are pricing in a full 25bp rate cut at the September FOMC meeting, and about a 25% chance of 50bp, today’s speech could excite or disappoint markets - we think the market will be disappointed.
Fed and the Outlook for Rates
A 25 bps cut is an odds-on bet and discounted. We doubt Powell will hint at a 50 bps cut - we had two Fed members speak yesterday and we expect Powell to adopt a similar tone.
Two FOMC members noted yesterday that while they believe it’s appropriate for the US central bank to begin lowering interest rates soon, the pace of subsequent cutting should be “gradual” and “methodical.” (Boston Fed President Susan Collins) she’s not seeing any “big red flags” in the economy. That’s the context in which I do see it soon being appropriate to begin easing policy,” she added. “I think a slow, methodical approach down is the right way to go.” Philadelphia Fed President Patrick Harker noted, “For me, barring any surprise in the data we’ll get between now and then, I think we need to start this process.”
There is no urgency to cut rates aggressively the market is looking at rate cuts that would indicate a recession is unfolding but it isn't the economy is slowing up but there is no collapse in the data and inflationary pressure still remains stubborn.
Federal funds rate (FFR) futures contracts are pricing in 100bps of rate cuts over the next six months and 185bps over the next 12 months. "We think that dovish outlook for rates is overdone and expect it to be pared back over the coming weeks." (Yardeni)
The market expects aggressive rate cuts but the Fed will be cautious, especially with an election coming up in November which if Trump were to win would unleash inflationary policies.
The views of TS Lomard which we agree with: “The dollar has weakened significantly, nearing January lows, driven by global monetary easing, US recession fears, and the fading of Trump trades. These trends may have run their course, and there’s a potential for a dollar rebound. Historically, the dollar often remains stable or strengthens in the 12 months following the first Fed rate cut.” (TS Lombard)
Technical Analysis
Our view of the key levels of support and resistance to look out for on both the daily and weekly charts below.
