Daily Market Comment – Dollar treads water as all eyes on Powell


Raffi Boyadjian, XM Investment Research Desk
  • Markets steady as Powell’s highly anticipated Jackson Hole speech awaited
  • Dollar braces for major dovish tilt by the Fed
  • Aussie and kiwi lead the gainers; loonie seeks further oil boost

How dovish can the Fed get?

Fed chief Jerome Powell will take centre stage when he updates investors on the Fed’s policy framework review at the annual Jackson Hole conference of central bankers, which has gone virtual this year due to the ongoing pandemic. Powell will deliver his hotly anticipated remarks at 1310 GMT and is widely tipped to announce a more flexible approach to targeting inflation.

Speculation has been rife that after a year-long examination of its framework, the Fed is about to change strategy and adopt a policy of average inflation targeting. However, while it’s certain Powell will provide some update on the findings of its review, there’s a risk investors will be disappointed if he stops short of announcing a shift to average inflation targeting.

Nevertheless, Fed policymakers only need to go as far as suggesting that the central bank is ready to let inflation run above the 2% target for an extended period of time to make up for more than a decade of mostly undershooting its target, and markets will read that as a very dovish signal.

Major currencies were steady ahead of Powell’s speech, but equity markers were more cautious as US and European stock futures slipped after a mixed session in Asia.

Dollar on shaky ground

The US dollar regained some footing after extending yesterday’s losses at the start of Thursday trading. The greenback was flat versus the yen, euro and pound as European trading got underway, but the calm may not hold for long if Powell meets markets’ very dovish expectations.

A jump in Treasury yields in August put a halt to the dollar’s sell-off but that support stemming from higher yields could disappear if the Fed is able to convince investors that it is serious about loosening its grip on inflation. One possible risk, though, is that such a strategy may sink short-term yields but lift longer-dated ones, in which case, the downward impact on the dollar may not be so great.

However, regardless of what the Fed reveals today, the steady improvement in global risk appetite should keep the dollar on the back foot for a while longer as investors remain optimistic about the recovery prospects of the big economies.

Commodity currencies outperform

That sentiment is what’s been behind the Australian dollar’s rebound from the virus crash, and the risk sensitive currency was the biggest gainer today as it approached its recent 1½-year peak of $0.7275. The aussie was bolstered today from a less-than-expected drop in business investment in the second quarter, underlining the Australian economy’s resilience to the COVID-19 crisis.

The kiwi also stood out, climbing to a one-week top, amid signs the recent virus flare-up in New Zealand is being contained.

The Canadian dollar, meanwhile, was flat as it flirted with fresh 7-month highs versus the greenback, waiting for another boost from oil prices following production stoppages in the Gulf of Mexico as a hurricane approaches the region. Both WTI and Brent crude were trading near 6-month highs, with bulls on standby should the hurricane impact become more severe.