Dimon says U.S. economy is weakening but not a "disaster" - CNBC
Plenty of Fed speakers this week will clarify the FOMC’s policy views after Chair Powell’s cautious remarks last week. With the Dot Plot signalling two more cuts this year, we don’t expect much support for the US dollar, which is looking moderately expensive in the short-term. PMIs across developed countries and the US PCE are the other highlights this week
USD: Fine-Tuning the Fed Message
The dollar is looking moderately cheap according to our short-term fair value model. Some positioning adjustments probably played a role in last week’s reaction to the Federal Reserve rate cut, and while the drop in jobless claims bucks the negative trend of job market news, the bar remains relatively high for more data surprises to lift the dollar.
That’s because, despite Jay Powell’s attempt to soften the dovish tone in the press conference, the Dot Plot (median implying two more cuts this year) should, in our view, work as the strongest anchor for rate expectations.
Expect a lot of focus on Fedspeak this week. Investors are attempting to gauge whether Powell’s cautious tone on the need for more cuts is shared by the majority of the FOMC. Today, we’ll hear from hawkish-leaning Beth Hammack, Alberto Musalem, and Tom Barkin, from dovish-leaning John Williams, and from Stephen Miran, who voted for a 50bp cut last week. Powell speaks on the economic outlook tomorrow.
On the data side, the highlight of the week is the core PCE read for August, which we expect at 0.2% month-on-month, in line with consensus. That should reinforce expectations for two cuts by year-end (now 43bp priced in), and contribute to our moderately bearish bias on the dollar for the week.
EUR: Upside Risks Persist
This week’s eurozone calendar revolves around tomorrow’s PMIs, which are expected to flatten out after some good August readings. Later this week, the German Ifo will complete the activity survey picture.
There are also a few European Central Bank speakers to watch, with José Luis Escriva, Philip Lane, and Joachim Nagel speaking today. Governing Council doves have been relatively silent, and while it might be too early to hear strong opposition to the “good place” narrative from ECB President Christine Lagarde, our economics team signals some risk of the doves becoming more vocal later this year.
EUR/USD’s short-term fair value is 1.190 as of this morning, and we see upside risks beyond the 1.180 level this week as the dollar may shed its post-Fed gains.
GBP: Bailey and Pill Speak Today
Central bank speakers and PMIs will also be in focus in the UK this week. Bank of England Governor Andrew Bailey and Chief Economist Huw Pill will speak today. Bailey said last week that rate cuts should continue, but at a more unpredictable pace.
As discussed here, we retain a preference for another rate cut in November. Considering market pricing is 7bp, EUR/GBP has upside potential into year-end. Noise surrounding the November Budget can contribute to upside volatility.
But for this week – barring major divergence in PMIs – EUR/GBP may not drift much higher given the lack of convincing drivers to sell the expensive pound.
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