A few more thoughts on Friday – Commerzbank

There was little movement in the currency markets yesterday. It almost seemed as if the markets were still recovering from the weekend and the Fed symposium in Jackson Hole. After losing value against all of the G10 currencies on Friday, the US Dollar (USD) was able to recover somewhat against most of the currencies yesterday, although the news was very thin on the ground, at least for currencies markets. The President of the San Francisco Fed, Mary Daly, did not say anything new yesterday when she reiterated that the time for rate cuts has come and that of course it is not yet known what the path of rate cuts will be, Commerzbank’s FX strategist Volkmar Baur notes.

Fed has everything it needs for September

“I think Jerome Powell surprised the markets with his dovish comments on Friday, even though on Friday morning I still thought this to be unlikely. We had not heard such a clear statement that the first move would come in September. And while that may not have changed the path that the market was already pricing in, it did reduce the risk around that assumption. The key point is that the risk was only been taken off one side. Only the residual risk that rates would remain unchanged in September was reduced. That is why the market was pricing in a higher probability of a 50-basis point move in September on Friday night. And that was the dovish surprise.”

“I find the discussion about data dependency versus forward guidance interesting. Of course, the central bank will emphasize that it has not yet made a decision and wrap that in the word ‘data dependent.’ However, there is only one more jobs report before the September meeting. And as we know, this time series is very volatile, and there are first revisions, second revisions and further ones after that. So the Fed would be well-advised not to rely too heavily on this one last employment report, even if it surprises a bit one way or the other. Of course, the central bank is dependent on the data. But 95 percent of what it needs to know for its September meeting should already be available. And maybe it would be good to emphasize that sometimes.”