Jackson Hole was damaging but not a disaster for the U.S. dollar. The greenback traded lower against all of the major currencies with the EUR/USD rising to its strongest level since January 2015 and USD/JPY sinking back towards 109.00 before settling above that level. In some ways the move was surprising because Janet Yellen’s comments should have been positive rather than negative forthe greenback. She said substantial progress has been made in their twin goals of hitting 2% inflation and full employment and she also felt that excessive optimism could return sooner or later. But that’s all Yellen said about monetary policy and based on the decline in the dollar on Friday investors clearly wanted more. She did not mention balance sheet normalization and certainly did not touch on future rate hikes. This does not mean they are not on her mind but with the market’s high expectations for this speech, investors were disappointed when Yellen failed to provide stronger policy guidance. The biggest breakout this past week was in euro, which enjoyed a far stronger move than the greenback after Jackson Hole.
As many economist anticipated, ECB President Draghi did not share any new information on the central bank’s monetary policy plans but he said the Eurozone recovery is gaining momentum. Although he also added that they aren’t quite there on inflation, the market completely ignored these words. He’s reserving the big announcements for his home turf and taking a break before the real action in Europe begins the first week of September.
The euro’s quiet strength this past week reflects the positive trend of the economy. Manufacturing and service sector activity in Germany accelerated this month, allowing businesses to remain optimistic. However while the PMIs and expectations of the German IFO report were stronger than anticipated, the expectations component of the German ZEW survey, which measures investor confidence slumped and the overall IFO business climate index declined in the month of August. In other words, the momentum in the economy is waning. Yet while Draghi remained tight lipped, over the past week we heard from a number of ECB officials who seem to be taking every opportunity to spread their hawkish wings. This includes ECB member Schauble who said the central bank should tighten policy sooner rather than later. ECB Hansson downplayed the 13% rise in the euro year to date and instead described the euro’s gains as not a big change. Before that, Weidmann “sees no acute need to extend QE into 2018.” These consistent comments 2 weeks before the ECB meeting reflects the growing consensus within the central bank to normalize policy. In the week ahead it is a quiet one for many countries but EUR/USD will be on the move. Between the U.S. non-farm payrolls report and German/EZ consumer prices and employment numbers, the data along with the performance of the euro could shape the market’s expectations ahead of the ECB meeting.
As many economist anticipated, ECB President Draghi did not share any new information on the central bank’s monetary policy plans but he said the Eurozone recovery is gaining momentum. Although he also added that they aren’t quite there on inflation, the market completely ignored these words. He’s reserving the big announcements for his home turf and taking a break before the real action in Europe begins the first week of September.
The euro’s quiet strength this past week reflects the positive trend of the economy. Manufacturing and service sector activity in Germany accelerated this month, allowing businesses to remain optimistic. However while the PMIs and expectations of the German IFO report were stronger than anticipated, the expectations component of the German ZEW survey, which measures investor confidence slumped and the overall IFO business climate index declined in the month of August. In other words, the momentum in the economy is waning. Yet while Draghi remained tight lipped, over the past week we heard from a number of ECB officials who seem to be taking every opportunity to spread their hawkish wings. This includes ECB member Schauble who said the central bank should tighten policy sooner rather than later. ECB Hansson downplayed the 13% rise in the euro year to date and instead described the euro’s gains as not a big change. Before that, Weidmann “sees no acute need to extend QE into 2018.” These consistent comments 2 weeks before the ECB meeting reflects the growing consensus within the central bank to normalize policy. In the week ahead it is a quiet one for many countries but EUR/USD will be on the move. Between the U.S. non-farm payrolls report and German/EZ consumer prices and employment numbers, the data along with the performance of the euro could shape the market’s expectations ahead of the ECB meeting.
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