An unexpectedly weak July jobs report, coupled with big downward revisions to hiring in May and June, bolstered hopes of an imminent reduction in borrowing costs, with traders even pricing in a jumbo rate cut for the next meeting in September.
However, since then, cautious comments from other policymakers and economic data flashing inflationary risks have tempered those expectations.
Still, traders are pricing in a 75% chance of a 25-basis-point (bp) rate cut in September, down from 92% a week earlier, the CME FedWatch tool showed.
Fed officials appeared lukewarm yesterday to the idea of a rate cut next month, setting the stage for Powell’s speech at the annual Jackson Hole conference in Wyoming, which kicked off yesterday.
“Powell is unlikely to pre-commit to a September cut,” said Charu Chanana, chief investment strategist at Saxo.
“The Fed has a dual mandate, but right now inflation outweighs labour as the bigger risk,” Chanana said.
“With another inflation and payrolls print still due before the September meeting, Powell has every reason to stay patient and keep optionality open,” Chanana added.
That might leave the dollar vulnerable after a steady but unspectacular rise in the past week.
The euro last bought US$1.1613, down 0.8% for the week, while sterling was steady at US$1.3416, down nearly 1% for the week.
The dollar index, which measures the US currency against six rivals, was at 98.61, on course for a 0.7% rise in the week, snapping its two-week losing streak.
Market pricing for a September rate cut sets a high bar for Powell to ‘out‑dove’ the market, according to Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia.
“We expect a larger lift in the dollar if Powell challenges current high market pricing of a 25 bp September cut.
“Put another way, the dollar faces asymmetric risks with greater upside potential than downside,” Capurso said.
The yen fetched ¥148.45 per dollar in early trading after core inflation in Japan slowed for a second straight month in July but stayed above the central bank’s 2% target, keeping alive expectations for a rate hike in the coming month.
The yen is on course for a weekly drop of over 0.8%, its biggest decline in a week since mid-July.
“We expect the Bank of Japan (BOJ) to raise its policy rate in October,” said Min Joo Kang, senior economist at ING.
“The core inflation is likely to remain above 3% for an extended period… This will support the BOJ’s policy of normalisation,” he added.
The Australian dollar was little changed at US$0.6425, set for a 1.2% drop for the week, while the New Zealand dollar eased a tad to US$0.58145, on course for a 1.8% weekly decline, its biggest drop in more than four months.