FX Daily: Plenty Is priced In, But The Fed Is The Fed

All eyes are on Fed chair's speech at Jackson Hole today and the main focus will be on any hints about adopting average inflation targeting and for the market to better understand the conditions that would prompt yield curve control.

USD: Plenty is priced in, but the Fed is the Fed

All eyes are on Fed Chair Jerome Powell’s speech at Jackson Hole today at 15:00 CET.

While market expectations are running high (the dollar received another hit yesterday with cyclical G10 FX rallying) we don’t think the Fed Chair will disappoint (i.e, we don’t look for a lack of dovish bias which would trigger an equity sell-off and would, in turn, help the dollar). (UDN, UUP)

The main focus will be on any hints about the Fed adopting 'Average Inflation Targeting' and for the market to better understand the conditions that would prompt yield curve control. The possible adoption of the Average Inflation Targeting (i.e, allowing for inflation to overshoot to make up for prior undershoots) would cement prospects of low US real rates for the foreseeable future and in turn keep the dollar on the back foot in the coming quarters.

While arguably plenty is priced in (as yesterday’s price action suggests), with the market sticking to a glass half full approach over recent months, we don’t see much room for correction in the dollar higher and expect the broad-based soft dollar environment to continue into the year-end.

EUR: Benefiting less than others

The EUR lagged other G10 currencies in yesterday’s rally, continuing the theme of recent EUR/USD stability (partly a function of the very stretched long EUR speculative positioning). The lack of any recent EUR gains equally suggests that the currency should fare better vs most of other G10 FX if Powell disappoints today, though that's not our base case.

The recent EUR underperformance within the G10 FX segment also translated into weaker CEE FX, which lagged its emerging market peers in recent days, despite the rebound in cyclical FX yesterday. (FXE)

GBP: Helped by risk sentiment, but complacency remains

In line with other G10 FX currencies, GBP received a boost yesterday ahead of the Fed Chair speech today. Following the recent gains, we estimate that all risk premia has been priced out of GBP, with EUR/GBP currently trading at its short-term fair value.

With high uncertainty about the outcome of EU-UK trade negotiations in place and the ongoing risk of a no-deal, we see current pricing as complacent and expect EUR/GBP to return above the 0.90 level in the coming weeks. (FXB)

SEK: Economics indicators in the shadow of Powell’s speech

The usually closely watched Swedish August Economy Tendency Indicator will play second fiddle to Fed Chair’s Jackson Hole speech today. The procyclical high beta SEK already received a boost yesterday and should Powell not disappoint today, SEK is likely to hold on its gains vs EUR, potentially pushing below the 10.30 level today.

SEK to underperform NOK given the higher beta of the latter and the krone’s exposure to oil.