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Fed speak may dictate dollar direction

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By Han Tan, Chief Market Analyst at Exinity Group

Asian stocks are down Wednesday although the Nikkei 225 is being spurred higher by Softbank’s climb, as well as expectations for more stimulus from Japan’s next prime minister.

Overall, Asian stocks are taking a breather, which isn’t a surprise considering that the MSCI Asia Pacific Index has gained in 11 out of the past 12 trading sessions. European stocks and US futures are firmly in the red ahead of Wednesday’s Fed speakers and the ECB policy meeting scheduled on Thursday.

The dollar index (DXY) is trying to recover above its 50-day simple moving average (SMA), with markets wading back in to price a fourth quarter 2022 US rate hike.

According to the Fed funds futures, the chances of a Fed rate rise have increased by six percentage points since Monday to 44%, while the odds for a December 2022 hike still remain above 70% despite the dismal August US headline jobs figure.

On Tuesday, St. Louis Federal Reserve President James Bullard was the first Fed official to comment after the employment report and steadfastly stuck to his hawkish guns, which helped the buck unwind some of its recent losses.

Markets will look to glean further clues about the Fed’s tapering bias from the speeches by New York Fed President and FOMC Vice Chair John Williams, as well as Dallas Fed President and 2023 FOMC member Robert Kaplan. The former is on the FOMC’s dovish spectrum, while the latter is a well-known hawk.

Ultimately, markets want to know the Fed’s tapering inclinations in the wake of last month’s hiring slump. Should the slowdown in the US jobs market give the Fed reason to pause on its tapering ambitions, that could keep the greenback subdued and the DXY below its 50-SMA.

 

Delta to keep ECB ultra-accommodative

Markets believe that the ECB will stick to its ultra-accommodative stance for longer at its policy meeting on Thursday, given that European equities are still near record highs despite Wednesday’s pullback, while EURUSD has been repelled at 1.19 for a second time this quarter.

Despite the Eurozone’s August CPI print of 3% exceeding the central bank’s target and reaching its highest in a decade, the doves may still outmuscle the hawks, as downside risks still weigh on the continent’s economic outlook.

While the hawks of late have been bold enough to begin publicly mulling the prospects of unwinding the ECB’s emergency asset purchases, the bar has been set high for a hawkish surprise out of Thursday’s meeting.

Delta variant uncertainties still feature in the economic outlook, which have already dampened confidence levels of businesses, investors and consumers in Germany, the EU’s largest economy.

Hence, the ECB hawks may have a tough time rallying their colleagues to their cause until there’s a significant dilution in downside risks or stronger signs that inflationary pressures are here to stay.

 

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Exinity ME Ltd, a company registered under the Laws of the Abu Dhabi Global Market (ADGM), is authorised and regulated by the Financial Services Regulatory Authority (FSRA)