Powell And Lagarde Rhetoric Crucial For Pound Sterling Vs Dollar, Euro

25.08.23: Central Bank Talk to Dominate, Powell and Lagarde Rhetoric Crucial for Near-Term Euro and Sterling Moves Against the Dollar

The latest round of business confidence data has increased reservations surrounding the global economy with significant weakness in the US and Europe.

Tight monetary policies by the Federal Reserve and European central banks will also undermine activity, especially with central banks seeing a slowdown as crucial to bring inflation down.

Given the weak data, fears that higher interest rates will have a more substantial impact in undermining demand have also tended to intensify.

In this context, risk conditions have deteriorated with fears that corporate earnings will come under pressure.

Comments from Fed Chair Powell and ECb President Lagarde will be crucial for near-term risk conditions, especially given vulnerable risk conditions.

If Powell stays hawkish, there will be direct dollar support on yield grounds. Risk conditions will also be important with net US currency support if equity markets come under further pressure.

The relative stance between Powell and ECB President Lagarde will also be an important element for underlying currency-market expectations.

With pre-weekend position adjustment, overall conditions will be volatile later on Friday.

Pound US Dollar Exchange Rate Outlook

The Pound was resilient in early Europe on Thursday, but struggled to make any headway and there were net losses later in the day.

The CBI retail sales data usually has little impact, but a very weak reading for August reinforced concerns over the UK outlook.

The weak PMI data released on Wednesday continued to undermine confidence and there was a further scaling back of expectations surrounding Bank of England interest rates.

The Pound was also undermined by a slide in risk appetite during the Asian session on Friday.

Overall, the Pound to Dollar (GBP/USD) exchange rate posted sharp losses to 2-month lows at 1.2560.

A recovery in UK consumer confidence for August had little overall impact.

Comments from Fed Chair Powell and overall risk conditions will remain very important in the near term.

The Pound will remain vulnerable in the short term and will need a more neutral stance from Powell to regain ground while a hawkish Fed stance would risk a slide to 1.2500.

Euro (EUR) Exchange Rates Today

The Euro was unable to extend the recovery on Thursday and gradually lost ground.

ECB Council member Centano stated that the bank needed to be cautious at the next meeting.

Although he stated that there are plenty of data releases still to come ahead of the September decision, he added that downside risks to the economy have materialised.

There were more hawkish comments from Bundesbank head Nagel who stated that it was too early to consider a pause in interest rates.

Given the deterioration in Euro-Zone data and recession fears, the dovish rhetoric chimed more closely with underlying market sentiment.

The Euro to Dollar (EUR/USD) exchange rate continued to lose ground and posted fresh 2-month lows just below 1.0780 on Friday.

Comments from ECB president Lagarde will be watched closely on Friday.

The German IFO business confidence index is liable to deteriorate further for August and a steep decline would reinforce fears over the outlook.

The latest COT data, released by the CFTC, will also be important given the potential for a liquidation of long Euro positions.

Overall, the Euro will need relatively neutral rhetoric from Fed Chair Powell and a relatively tough stance from Lagarde to regain territory.

ING expects that Lagarde will be relatively hawkish and protest against the shift in market expectations. It adds; “We think there is room for some re-tightening after Lagarde’s speech today, and for EUR/USD to enjoy a relief rally after the break below 1.0800 saw more bearish momentum building overnight.”

US Dollar (USD) Exchange Rates Outlook

US initial jobless claims declined to 230,000 in the latest week from a revised 240,000 the previous week and below consensus forecasts of 240,000 while continuing claims edged lower to 1.70mn from 1.71mn.

Philadelphia Fed President Harker reiterated that he considered that further interest rates were not required.

The comments briefly undermined the dollar, but selling pressure quickly eased and the US currency posted net gains.

There were important concerns that Fed Chair Powell would adopt a hawkish policy stance in his keynote speech at the Jackson Hole symposium on Friday.

Overall risk appetite gradually deteriorated with notable losses on Wall Street.

Weaker risk conditions also boosted the dollar with the currency index posting a strong advance to 11-week highs.

Powell comments will be crucial for the dollar later on Friday.

According to ING; “Powell will once again have to deal with his own Committee’s projections that see rates being raised one last time this year: he will probably reiterate the Fed is open to such a possibility and retains a data-dependent approach.”

The shift in expectations ahead of the speech will be important.

Given the slide in risk ahead of the comments, there will be relief if Powell is relatively balanced in his commentary.

OCBC currency strategist Christopher Wong commented; “The risk is that Powell’s message or tone comes across as less hawkish than expected,” Wong said. “He does not need to be dovish but a less hawkish speech could see dollar ease off.”

The dollar, however, is likely to find solid buying on dips given the overall global profile.

Other Currencies

The Pound overall remained on the defensive, although a wider slide in risk conditions also had a significant impact.

The Pound to yen (GBP/JPY) exchange rate dipped to lows dipped to 2-week lows just below 183.50 before trading just above this level.

Commodity currencies were hampered by weaker equities, limiting the scope for Pound losses on the crosses.

The Pound to Australian dollar (GBP/AUD) exchange rate still retreated to 10-day lows at 1.9590.

The Pound to New Zealand dollar (GBP/NZD) exchange rate also tested 10-day lows below 2.1240 before a net recovery to 2.1275.

Oil prices were broadly resilient with the Pound to Canadian dollar (GBP/CAD) exchange rate also retreating to 10-day lows just above 1.7080.

The Day Ahead

Comments from Federal Reserve Chair Powell will dominate on Friday.

Markets will also be monitoring wider comments from central bank officials at the Jackson Hole symposium during the day.

The symposium will also continue on Saturday.

Overall risk trends, equities and bond yields will remain a key influence on currency markets.

Markets will continue to monitor Chinese developments closely with the fiscal and monetary policy stance important for global sentiment.