As the summer holidays start to pull to a close, market participants are starting to get back online. Yet for the most of the week, FX pairs traded in fairly tight ranges. The build up was always going to be for the Friday, with Fed Chair Powell speaking at Jackson Hole. We flagged up the importance of this in our preview of the week, which can be read here.
A quiet week for FX in review
We started the week with a broad risk-on mood, characterized by USD selling. This fed through from gains in the equity markets and a retracement from the potentially overdone risk sell off that we saw from the end of last week in key pairs.
For example, GBP/USD managed to have a strong bounce of a cent from the low 1.36’s. We flagged up this potential move in our preview piece, as the move lower had gone too fast, too quickly in our view. The market had also digested the situation in the Middle East and so although we got news throughout the week on the evacuation, the market wasn’t as concerned.
Positive manufacturing and services PMI’s also boosted GBP crosses in the early part of the week. We feel that the continuation of the economic recovery in the UK makes GBP a good buy for the long-term.
Jackson Hole sees USD offered
After meandering through the middle part of the week, the focus as we came into the back end was the Jackson Hole summit. This event is one where various Fed speakers and other notable economists talk through monetary policy and other relevant financial topics.
In Powell’s Friday morning address, he actually provided a dovish lean to his comments, which saw the USD sell off as a result. Although Powell noted that tapering asset purchases could still begin this year, he expressed concern about the state of the recovery in the US. He also still sees inflation as largely transitory, which would lessen the need to start raising interest rates anytime soon.
Interest rate expectations are a key driver for the US Dollar, given the yield investors gain from holding funds versus lower yielding currencies such as EUR, CHF and JPY. With rate hikes kicked further down the road, this naturally provides weakness for the greenback.
The USD was sold into the close on Friday, although notable pairs failed to break key levels. EUR/USD rallied but failed to break the 1.1800 barrier, closing at 1.1794. GBP/USD pushed up to the mid 1.37’s but remains stuck in a medium term bear trend. USD/JPY failed to hold onto the 110.00 handle, closing around 109.83.
Our FX review notes that bar the Jackson Hole summit, the week was a fairly quiet one. With the summit continuing as we speak, more information could be gleaned that could give the markets a kick start to next week. We will focus on this (and other points) in our FX preview released shortly.