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Beware the Hole

View from the Trading Desk:

The US Dollar has been on an absolute tear in the past week, with market players slashing their risk-exposure heading into the annual Jackson Hole Symposium in Wyoming. The trade-weighted Greenback has risen around 2.25% since last Monday while equities have softened, and US ten-year Treasury yields climbed back towards the 3.00% handle. Still, we've got bad news for you if you're reading this in search of some respite. Factoring in the highly unstable economic and geopolitical climate, there don't seem to be very many drivers of US Dollar weakness in the near term.

For the most part, financial conditions in the US have been easing since the Federal Reserve's July meeting, with investors betting on a slower pace of monetary policy tightening. Meanwhile, signs that inflationary pressures are peaking have emerged, complicating the picture for Fed officials. In this Friday's speech, Fed Chairman Jerome Powell will have the opportunity to reset market expectations that looser policy lies around the bend. We expect him to strike a cohesive tone with fellow Fed officials that the bank will do what it takes to return inflation to its 2% target, even if that means a recession. Pricing for September will probably remain at 50-75bps of Fed rate hikes, but the real challenge will be convincing markets that policy reversal is not baked-in at the first sign of economic slowdown.

Meanwhile, the economic situation in the UK and Europe offers no help to Sterling or Euro bulls. Last Friday's data showed a deeper-than-expected decline in British Consumer Confidence after Wednesday's inflation reading came in worse than economists had expected. On the continent, this week's flash European Services and Manufacturing PMI data prints are both forecast to fall further into contractionary territory.

Bottom line: It really is tough out there. Another leg lower in asset prices could help bolster the US Dollar going into the Jackson Hole event, which begins on Thursday. To offer a glimmer of hope, the JP Morgan one-month G10 FX Volatility Index, below, has risen back toward levels not seen at any point in the past five years—discounting the peak Covid-19 panic. That could offer some opportunities to capture value if you're quick.


Source: Bloomberg

The week ahead


The Sterling to US Dollar exchange rate slumped heavily last week despite some better-than-expected UK economic data and a rise in market expectations for the Bank of England interest rates. This week could see the Pound fall even further as commentary from the Federal Reserve and a busy US economic calendar has the potential to rally the US Dollar along with US bond yields. In the face of UK inflation hitting 10.1% last week and official data suggesting that retail spending remained constant, Sterling tumbled against the Euro late last week to one-month lows. The Flash Purchasing Managers’ Index data will likely be the most pivotal UK ecostat this week and could help shape the market forecast of the UK economy.

  • On Tuesday morning, flash Manufacturing PMI and flash Services PMI data will be released, with a small industry expansion forecast for both.
  • The Confederation of British Industry (CBI) Realised Sales monthly data is expected this Thursday and is expected to show a lower sales volume than the July data.



Late last week, the Euro to US Dollar exchange rate tumbled as Federal Reserve officials hinted at a third 75-basis-point increase in US interest rates during the meeting next month. The European currency temporarily benefitted from the European Central Bank implying that a second 50-basis-point hike was still on the table for September. However, this was short-lived, and the Euro entered the new week dangerously close to the parity milestone with the US Dollar. The Euro could slip to decade lows this week if it follows last week’s trend, and the key factors will be the decisive US Flash Services and Manufacturing data followed by the US Gross Domestic Product growth estimate.   

  • Both French and German flash Services PMIs are due for release this Tuesday, with an industry expansion predicted for France and a contraction set for Germany.
  • Also on Tuesday, we’ll see the French and German flash Manufacturing PMI data with an industry contraction forecasted for both.
  • Average yield data on German ten-year bonds sold at auction by the government will be released on Wednesday.
  • Final GDP q/q data for Germany is expected on Thursday morning, followed by the ECB Monetary Policy Meeting Accounts release later in the day. 



With the US Dollar boosted by hints from Federal Reserve officials that further interest rate hikes are ahead, the Pound to US Dollar exchange rate fell below 1.18 on Friday last week and remained steady over the weekend. However, with UK economic figures going overlooked and multiple US economic data releases on the horizon, Analysts from MUFG warn that Cable could fall as far as 1.15 in the coming months. This week, all eyes turn to the US economic calendar, which will include the release of Home Sales figures, unemployment numbers, Personal Consumption Expenditures, and GDP data, all of which could be pivotal for how the Greenback performs over the coming days.

  • On Tuesday, the US flash Services PMI data is forecast to show no change in industry size despite a contraction last month.
  • The US Flash Manufacturing PMI is also expected on Tuesday with a small industry increase predicted, similar to the previous month.
  • Thursday will see the release of the preliminary GDP q/q for the US. Analysts are expecting a 0.8% annualised decrease in the value of goods and services produced by the economy.
  • Also on Thursday, the annual three-day Jackson Hole Symposium will commence in Wyoming, with a range of financial market participants expected from around the world. 


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