Extra Tapering Hints at Jackson Gap

Basic Forecast for the US Greenback: Impartial

• The US Greenback (through the DXY Index) has moved as much as contemporary yearly highs as merchants have begun to anticipate a faster-than-expected timeline to the Federal Reserve’s stimulus withdrawal.
• Fed Chair Jerome Powell’s speech at Jackson Gap is vaguely titled “The Financial Outlook,” and is about to happen on Friday, August 27 at 10 EDT/14 GMT.
• Based on the IG Shopper Sentiment Index, the US Greenback has a blended bias heading into the final week of August.

US Greenback Units New Highs

The US Greenback (through the DXY Index) added +1.01% final week, shifting up to contemporary yearly highs as merchants have begun to anticipate a faster-than-expected timeline to the Federal Reserve’s stimulus withdrawal. The biggest element of the DXY Index, EUR/USD charges, dropped by -0.81% and closed beneath 1.1700 for the primary time since October 2020. USD/JPY charges gained +0.16%, hampered by weak point in fairness markets.

However features for the US Greenback had been flush throughout the board in any other case as escalating delta variant considerations sapped confidence in international growth-sensitive currencies: GBP/USD fell -1.76%; AUD/USD dropped -3.13%; NZD/USD sank -2.94%; and USD/CAD added +2.47%.

US Financial Calendar Not Ready on Jackson Gap

The top of August will produce a busy docket of occasion danger based mostly out of the US. Over the course of the week into of the Jackson Gap Financial Coverage Symposium, there are 5 ‘excessive’ rated occasions that maintain promise to result in vital occasion risk-based volatility.

• On Monday, August 23, the JulyChicago Fed nationwide exercise index, the August US Markit manufacturing PMI (flash), and the July US present residence gross sales knowledge are due.
• On Tuesday, August 24, the July US new residence gross sales report will likely be launched.
• On Wednesday, August 25, the July US sturdy items orders report is about for publication.
• On Thursday, August 26, the Jackson Gap Financial Coverage Symposium will start. The second launch of the 2Q’21 US GDP report is due, as are weekly jobless claims figures.
• On Friday, August 27, the July US PCE report (the Fed’s most popular gauge of inflation) will likely be launched, as will the August US Michigan client sentiment studying. At 10 EDT/14 GMT, Fed Chair Powell will ship his Jackson Gap speech, vaguely titled “The Financial Outlook.”

Atlanta Fed GDPNow 3Q’21 Development Estimate (August 18, 2021) (Chart 1)

Primarily based on the information acquired to this point about 3Q’21, the Atlanta Fed GDPNow development forecast has been downgraded from +6.2% to +6.1% annualized. After the previous week’s knowledge, “the nowcast of third-quarter actual residential funding development decreased from 3.Four % to three.Zero %.”

The following replace to the 3Q’21 Atlanta Fed GDPNow development forecast is due on Wednesday, August 25.

For full US financial knowledge forecasts, view the DailyFX financial calendar.

All Eyes (and Ears) on Fed Chair Powell

If solely to spotlight how far delta variant considerations have are available latest weeks, the Jackson Gap Financial Coverage Symposium has shifted from in-person to a digital occasion this coming week. The occasion, titled “Macroeconomic Coverage in an Uneven Economic system,” is more likely to stir volatility in monetary markets on the finish of the week and the beginning of the following.

Fed Chair Jerome Powell’s speech at Jackson Gap is vaguely titled “The Financial Outlook,” and is about to happen on Friday, August 27 at 10 EDT/14 GMT. The mysterious title will solely incentivize Fed watchers to search for extra clues {that a} Fed taper is nearing, insofar because the response to the July FOMC minutes has proved in line with the historic precedent set up across the 2013/2014 taper timeline.

Bond Market Anticipating a Hawkish Powell

We will measure whether or not a Fed price hike is being priced-in utilizing Eurodollar contracts by analyzing the distinction in borrowing prices for industrial banks over a selected time horizon sooner or later. Chart 1 beneath showcases the distinction in borrowing prices – the unfold – for the September 2021 and December 2023 contracts, with the intention to gauge the place rates of interest are headed within the interim interval between September 2021 and December 2023.

Eurodollar Futures Contract Unfold (September 2021-December 2023) versus US 2s5s10s Butterfly: Each day Fee Chart (August 2020 to August 2021) (Chart2)

We will overlay Fed price hike odds with the US Treasury 2s5s10s butterfly with the intention to gauge whether or not or not the bond market is performing in a way just like what occurred in 2013/2014 when the Fed started to maneuver ahead with its taper plans. The 2s5s10s butterfly measures non-parallel shifts within the US yield curve, and if historical past is correct, because of this intermediate charges ought to rise sooner than short-end or long-end charges.

Certainly, whereas Fed price hike odds had been largely unmoved after the July FOMC minutes – which clearly said the delineating between tapering and price hikes – we will see that the US yield curve is shifting in a way that means a extra hawkish Fed is right here. Whereas there are 87-bps of price hikes discounted by means of the tip of 2023, the 2s5s10s butterfly elevated to its highest price because the Fed taper discuss started in June.

US Treasury Yield Curve (1-year to 30-years) (August 2019 to August 2021) (Chart 3)

Traditionally talking, the mixed influence of rising US Treasury yields – significantly as intermediate charges outpace short-end and long-end charges – alongside elevated Fed price hike odds has produced a extra favorable buying and selling atmosphere for the US Greenback.

CFTC COT US Greenback Futures Positioning (August 2020 to August 2021) (Chart 4)

Lastly, taking a look at positioning, in accordance with the CFTC’s COT for the week ended August 3, speculators elevated their net-long US Greenback positions to 19,206 contracts from 18,880 contracts. Web-long US Greenback positioning is holding close to its highest degree because the second week of March 2020 (the apex of coronavirus pandemic considerations in monetary markets).

— Written by Christopher Vecchio, CFA, Senior Forex Strategist