Euro extends losses below 1.1650 with all eyes on Jackson Hole
- EUR/USD dips further, nearing 1.1640, on track for a 0.3% weekly pullback.
- The US Dollar picks up as Fed officials call for monetary tightening ahead of Warsh's speech at Jackson Hole.
- US inflation data released earlier this week revealed that price pressures remain well above the Fed's target.
The Euro (EUR) has resumed its recent downward trend against the US Dollar (USD) on Friday, with investors bracing for the Federal Reserve (Fed) Chairman Kevin Warsh’s speech at the Jackson Hole Symposium due later on the day. The EUR/USD pair trades near 1.1640 in the early European session, on track for a 0.3% weekly decline after having rallied about 2.5% over the previous four weeks.
The main focus on Friday is on the Jackson Hole meeting of central bankers, where Fed’s Warsh is expected to provide further insight into the bank’s plans to tame above-target inflation.
Warsh is reluctant to provide further guidance, but some central bank officials stood out on Thursday, putting pressure to tighten monetary policy amid the stubbornly high price pressures. Kansas Fed President Jeffrey Schmidt said on CNBC that inflation is “still sticky and we've got to continue to find ways to break through" while the Cleveland Fed President Beth Hammack reiterated that it is “time to act,” referring to interest rate hikes.
US inflation remains well above target
US Personal Consumption Expenditures (PCE) Prices Index figures, released earlier this week, revealed that consumer inflation accelerated 0.2% in July, above the 0.1% expected, and that the yearly rate grew at a steady 3.7% rate, almost twice the Fed’s 2% target. The Core PCE Price Index, more relevant from the monetary policy perspective, rose 3.3% in the 12 months to July, also unchanged from the previous month.
Strategists at Scotiabank see the current US Dollar recovery as corrective. “History suggests Jackson Hole can have a significant impact on market pricing,” say the Scotiabank experts, but adding that “1w implied vols are running well below recent averages, suggesting markets may be a little complacent about Warsh’s speech and the potential impact on markets.” Against this backdrop, they “still rather view DXY gains as a correction against a still deeply entrenched downtrend on the charts,” noting that “after a firm rise Wednesday, near-term focus reverts to the index retesting the mid-99 area.”
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.