Powell’s pivot?
With US stock indices hitting record highs on Friday, it is perhaps unsurprising that the market took a breather during the UK bank holiday yesterday. Light trading volumes during European hours, particularly within FX, created a steady start to the trading week. However, it was the turn of US equities to deliver some losses as the day progressed with most indices ultimately ending the day in the red. The upset in equities in turn delivered a flight to safety which lifted the Dollar. A weaker Euro exaggerated the move lower in EURUSD with EURGBP also dropping circa 40 points.
What is of greater significance than yesterday’s trading session is what took place at the tail end of last week at Jackson hole. The Fed Chair, Jay Powell, acknowledged that some policy adjustment would likely be necessary based on the balance of risks facing the labour market and inflation. These words allowed the Dollar to lose circa 1% as traders moved to price in further rate cuts. With the next Fed decision due in September, expectations are building for additional policy adjustment this year.
Yesterday’s consolidation is likely therefore the product of a rebalancing to the risk-on narrative put before markets last week. EURUSD still looks clear to settle higher as a result of the shifting monetary backdrop in the US. However, it isn’t all plain sailing in Europe. Contributing to the decline of the Euro yesterday was the announcement by the French Prime Minister that early next month he will call a vote of no confidence in the National Assembly most likely paving the way to further uncertainty in one of Europe’s foremost economies.
Discussion and Analysis by Charles Porter
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