Dollar edges higher ahead of Powell’s Jackson Hole speech

Investing.com - The U.S. dollar edged higher Friday, on course for strong weekly gains ahead of Fed chair Jerome Powell’s speech at the annual Jackson Hole symposium.

At 04:50 ET (08:50 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 98.622, on course for a rise of just under 1% this week, snapping its two-week losing streak. 

Powell’s speech in spotlight

The U.S. currency has gained this week as traders have reassessed Fed rate cut expectations ahead of an appearance by Powell at the central bank gathering in Wyoming, which is likely to influence money policy forecasts ahead of the September Fed meeting.

A soft July jobs report coupled with big downward revisions to hiring in May and June bolstered hopes of an imminent reduction in borrowing costs, potentially even as much as 50 basis points.

However, these bets have dropped significantly. Last week, traders were pricing in a 99 percent chance of a 25 bps rate cut at the next Fed meeting. That is now down to 71.5 percent, according to Investing.com’s Fed Rate Monitor Tool.

“Powell can hang the Fed’s September decision on the forthcoming August data releases of jobs (5 September) and CPI (11 September),” said analysts at ING, in a note.

“His equivocal remarks might come as a disappointment to those looking for full-throated support for a rate cut in September. However, he is going to have to acknowledge the sharp downward revisions to the jobs data in May and June, and it seems unlikely the market will start to price the probability of a September rate cut at less than 50%.” 

Weak German growth weighs on euro 

In Europe, EUR/USD dropped 0.1% to 1.1593, with the single currency hit by the release of disappointing growth data from Germany, the eurozone’s dominant economy.

The eurozone’s largest economy shrank by 0.3% quarter-on-quarter in the second quarter, compared with a prior estimate of a 0.1% decline, following a 0.3% expansion in the first quarter.

On an annual basis, GDP grew by just 0.2%, after seasonal and calendar adjustments.

The statistics office also sharply revised down GDP figures for 2023 and 2024. As a result, Germany’s economic output remains slightly below its 2019 level, underscoring a prolonged period of stagnation.

“Powell’s tone will determine whether EUR/USD has to trade all the way back to the 1.1500/1520 area, which is the outside risk should he manage to swing market pricing back to 50:50 for a restart to the Fed easing cycle in September,” said ING.

GBP/USD traded 0.1% higher to 1.3413, down around 1% this week. 

Yen slips after CPI release

Elsewhere, USD/JPY traded 0.1% higher to 148.57, offering a muted reaction to consumer price index data that showed inflation cooled in July.

But core inflation fell slightly less than expected, while underlying inflation remained well above the BOJ’s 2% annual target.

Sticky core inflation helped limit the yen’s losses, amid increasing bets that the BOJ will hike interest rates again this year. 

USD/CNY gained slightly to 7.1817, trading mildly higher for the week in the wake of the People’s Bank of China leaving its benchmark loan prime rates steady this week.

AUD/USD gained 0.1% to 0.6426.