A hawkish Powell re-energises rate hike bets and the USD

At the end of last week, Federal Reserve Chair, Jerome Powell, gave a speech to the Jackson Hole Symposium that hinted that the Fed would be willing to raise interest rates further, and leave them higher, than the markets currently predict. The news prompted the USD to rally to fresh multi month highs on a trade weighted basis, and also saw bets on the probability of another US interest rate hike before the end of the year increase as well. 

Powell’s comments jar with the experience of US homeowners and first-time buyers, who either find themselves trapped in their current mortgage finance deals or priced out of entry into the mortgage market, in my view. The US economy may look as if it is performing okay, but there are significant signs of stress across the housing and retail sectors that may take many quarters to rectify. Meanwhile, much of the market focus remains on the performance of the US labour market and developments in consumer price inflation. 

Attention will therefore switch this week to the August release of US non-farm payrolls. There has been a slowing in the pace of payrolls growth in recent months, but the labour market headlines indicate that the tightening in conditions continues. However, in spite of this, there are few signs of an increase in average earnings growth, which is still tracking in the low 4% region annually. The participation rate remains stubbornly low as well, still below where it was pre-COVID. These August figures are unlikely to report anything different, and the ongoing solid performance from the labour market should offer the USD some support in an otherwise quiet week, in terms of important releases from the major economies.  

From Euroland, the flash August consumer prices data should report a further drop in the headline inflation rate. Alongside surveys that point to a further weakening in Euroland economic activity, this is likely to be another piece of evidence which supports the European Central Bank pausing its rate hike cycle in September. If there is further weakness revealed in any of the surveys or activity data due this week from Euroland and its individual countries, then the prospects of another rate hike in this cycle will further diminish, in my opinion.

The GBP and EUR were undermined last week against the USD, as US interest rate hike speculation was briefly rekindled. This week, ongoing economic strength in the US may well contrast with weakness from the UK and Euroland economies. If that is the case, there is a prospect that GBPUSD will drop further beneath $1.26 than it has already visited, and EURUSD could test the end of May lows at $1.0635. With USDJPY making fresh 9-month highs (above ¥147), there may yet be room for more USD strength, in my view.

A cut from the Hungarian Central Bank doesn’t come this week after Turkish interest rates surge to 25%

Turkish monetary authorities have completed a U-turn on monetary policy over the course of recent months. Back in May of this year, Turkish interest rates were just 8.5%. Last week they rose from 17.5% to 25%, as Turkey grapples with ongoing inflation problems. Even this forceful action may not be sufficiently corrective for the Turkish economy, as headline inflation is currently running at close to 48% and core CPI (Consumer Price Inflation) inflation is above 56%. 

The only thing that is likely to be affected in the short term is economic confidence, with the most recent figures showing that it dropped almost 5 points in August, to register its lowest reading in over a year. Turkey’s economic problems are likely to persist and worsen into the end of this year, and could run throughout 2024, and that bodes ill for the lira, in my view.

This week has seen the Hungarian central bank decide to leave interest rates on hold. There was some risk that the Hungarian central bank would cut interest rates by 100 basis points, with the central bank declaring some sort of victory in its fight against inflation. However, a rate cut is not far off, and even when that comes, it should not prompt a weakening in the Hungarian forint, as it will offer support to the economy at the same time as reducing the rate of return, in my view. Hungary could be the template for other larger economies in the coming months.  

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