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  • richard evans

USD lower on weak PMI but still sees support ahead of Jackson Hole

Good morning

Some shine was taken off the US dollar yesterday when a disappointing S&P services PMI release highlighted some weakness in the US economy, leading to some dollar selling. EURUSD traded back above parity, reaching 1.0015, and GBPUSD had a solid jump to 1.1875. Neither pair have been able to hold those gains, EURUSD now down to mid-0.99s, GBPUSD now 1.1825.

It was something of a surprise to see such a move on one bad print but does prove that although the market may still think Powell will be hawkish, this is far from certain. However it has also proved that any signs of US dollar weakness will be bought into, and no one really has enough conviction to sell the dollar ahead of Jackson Hole. A weak durable goods number today could see a weaker USD but I would not expect those losses to last.

Powell may talk of some weakness in the economy but I’m thinking he will still talk of rate rises to come, even if they are not all 75bps rises. His colleague Kashkari has said again that his biggest concern is persistent high inflation. Kashkari did however add that a strong dollar may in itself help to bring inflation down, suggesting I suppose that Fed are not necessarily interested in seeing a weaker dollar for the time being. Kashkari was one of two Fed members who wanted a full 1% rise at the July meeting.

ECBs Panetta has followed Nagel in saying further rate rises may be needed despite the rising risks of recession in the EU. Of course, rate rises from ECB are likely to be far smaller than those from the Fed, so although this sounds mildly hawkish it is unlikely to ease pressure on the single currency.

No UK or EU data out today, attention will be on US durable goods but there is no doubt the main even is Powells speech on Friday at Jackson Hole. I’ve been asked to find some short dated and relatively cheap trade ideas, interestingly from both USD buyers who are worried about further USD strength, but also from more spec accounts who are hoping Powell disappoints and sends USD lower. I’ll report back with findings but no surprise I’m thinking Monday expiry options. They won’t be cheap but I’d rather that than risk a spot or forward trade.

I’ll leave it there for now as I’m running a little late, do feel free to ask if you’re interested in any short term trade ideas.

- 13.30 US durable goods orders

- 15.00 US pending home sales

- 23.45 NZ retail sales

- 07.00 German GDP

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