The US dollar experienced a decline from its 12-week peak on Monday, with market participants contemplating the trajectory of US monetary policy. This follows remarks by Federal Reserve Chair Jerome Powell, who indicated the possibility of additional interest rate hikes. Meanwhile, the Japanese yen remained near its lowest point in over nine months.
Powell’s Key Points:
During the much-anticipated annual Jackson Hole Economic Policy Symposium, Federal Reserve Chair Powell assured a cautious approach in upcoming meetings. He acknowledged both advancements in alleviating price pressures and potential risks stemming from the unexpectedly robust US economy. Powell emphasized the Federal Reserve’s commitment to address inflation and achieve its 2% target.
Dollar Index and Probabilities:
The dollar index, which measures the dollar against six major currencies, declined by 0.115% to 104.05, remaining in proximity to the 12-week peak of 104.44 reached on Friday. August witnessed a more than 2% gain in the index, ending a two-month losing streak. The CME FedWatch tool reflected an 80% likelihood of the Fed maintaining its current stance next month. However, the likelihood of a 25 basis point hike in November rose to 48%, compared to 33% a week earlier.
November Expectations and Market Dynamics:
Market expert Chris Weston, the Head of Research at Pepperstone, expressed skepticism about a September rate hike but highlighted the potential significance of the November meeting. He stated that November could witness substantial fluctuations in interest rate expectations based on upcoming data releases.
US Economic Data and Rate Path:
Recent robust US economic data releases alleviated recession concerns. However, persistent inflation above the Fed’s target has led to apprehension that the central bank might maintain elevated interest rates for a prolonged period. The upcoming US economic reports, including payrolls, core inflation, and consumer spending, are pivotal in shaping the trajectory of Fed policy.
Yen’s Performance and BOJ’s Stance:
The Japanese yen saw a marginal weakening of 0.03% to 146.45 per dollar, not far from its more than nine-month low of 146.64 achieved on Friday. Traders remain vigilant for potential currency market intervention by Japanese authorities. The Bank of Japan’s Governor reaffirmed the continuation of the current accommodative policy due to inflation in Japan remaining slightly below its target.
Euro, Sterling, and Antipodean Currencies:
Both the euro and the sterling rebounded from their two-month lows recorded on Friday. The euro posted a 0.04% gain to $1.0804, while the pound rose 0.17% to $1.2599. Additionally, the Australian dollar climbed 0.55% to $0.644, and the New Zealand dollar advanced 0.32% against the greenback, reaching $0.592.
The dollar’s retreat from recent highs demonstrates the market’s contemplation of the potential trajectory of US monetary policy. Powell’s measured approach and emphasis on addressing inflation provide investors with insights into the Federal Reserve’s stance. With anticipation focused on forthcoming US economic data releases, the market’s attention remains fixed on determining the path of interest rates in the months ahead.