Do you have any more doubt about the Fed’s intentions? [Video]

(Ipek Ozkardeskaya – Swissquote Bank Ltd)

Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole meeting wreaked havoc across the equity markets on Friday. His message was crystal clear: inflation must come down even if it means pain for households and businesses in the process.

Major US indices tumbled, the US yields advanced, and the US dollar gained. Gold and Bitcoin were sold.

In energy, European gas futures continue their spike and crude oil kicked off the week higher.

Due this week, the European flash CPI and the US jobs data will be in focus.

For the US, another strong jobs data would further back the Fed hawks, whereas in Europe, even a scary inflation figure, and revived ECB hawks, may not suffice to throw the single currency above parity against the US dollar.

US Dollar Index outlook: Hits new 20-year high on signal that interest rates would remain high

(Slobodan Drvenica – Windsor Brokers)

US Dollar Index

The dollar hit new 20-year high against the basket of major currencies in early Monday, driven by fresh demand on US interest rate outlook.

The dollar index opened with gap higher on Monday and rose to the highest since June 2002, after Fed Chair Jerome Powell, in his speech in Jackson Hole symposium on Friday, further boosted dollar’s positive sentiment by signals that US interest rates would stay higher as long as required to bring soaring inflation down.

Lift above former tops at 109.19/12 (also Fibo 76.4% of 2001/2008 downtrend) opens way for test of psychological 110 barrier, which guards 112.04 (June 2002 high), though the rally could accelerate towards 2001 peak if geopolitical and economic conditions deteriorate in coming months

Technical studies are bullish on all larger timeframes and contribute to positive outlook, with Friday’s long-tailed hammer candle signaling that the downside remains well protected, as last week’s pullback was very shallow and short-lived.

The index is on track for strong monthly advance (over 3%) which also marks the third consecutive month of rally and the biggest monthly gain since April that adds to positive signals.

Res: 109.42; 110.00; 110.22; 110.89.
Sup: 109.05; 108.67; 108.05; 107.46.

Set of data on CEE economic development

(Erste Bank Research Team)

This week, we get to see the GDP structure for the second quarter in a number of countries. In Czechia, we are waiting to see which factor was behind the positive surprise and stronger than expected growth, while in Poland, just the opposite pertains. The biggest question is whether the q/q contraction was driven mostly by the change in inventories and whether private consumption or investment already showed weakness. Separately, data on July’s retail sales and industrial production in Croatia, Slovenia and Serbia will be as important as the GDP structure, as it will give a hint on how strong these economies are at the beginning of the third quarter. Further, PMI indices for September for Czechia, Hungary and Poland will give a feeling how deep the slowdown in the third quarter is likely to be. Flash inflation numbers for August will be published in Poland and Slovenia, alongside July’s producer prices in Hungary and Romania. Last but not least, Hungarian central bank is holding rate setting meeting on Monday and another 100bp hike is broadly expected amid surging inflation and strong economic performance.

FX market developments

Over the last week, the Hungarian forint changed the most, not only among CEE currencies, but also globally. It weakened vs. the EUR by almost two percent. The underlying weakness of the Hungarian currency can be, among other factors, attributed to the struggle over EU fund payments, due in turn to the proceedings over the rule of law. On Monday, Hungary responded to the European Commission. The details of the letter have not been released, however. This week, Hungarian central bank holds rate setting meeting and another 100bp hike is broadly expected. So far, monetary tightening that brought Hungarian interest rates to the highest level in the region has been of little help to EURHUF. Hungarian forint depreciated by more than 11% year-to-date. At the same time, the Czech koruna and Polish zloty remained relatively stable throughout the week. The minutes from the Polish MPC meeting have not shed any light on the end of the tightening cycle. However, MPC member Wnorowski commented that the rate increase cycle would be nearing the end. The weak performance of the Polish economy in the second quarter supports such a scenario, with only a couple of hikes in sight.

Bond market developments

Government bond yields continued to increase for the second week in a row in CEE. Last week, 10Y LCY government bond yields increased 20-50bp w/w, with the CZGB yield curve showing the strongest move, as the whole curve shifted up 48bp w/w. It was quite interesting to see FRAs on the Czech money market going up, despite previous beliefs that further rate hikes have become unlikely under the new MPC composition/leadership. This could be the effect of the alarming increase of electricity and gas prices on the European market, which could delay the peak of inflation and put more pressure on the central bank to anchor inflation expectations. Yields on 10Y HGBs climbed to almost 8.9% at the beginning of last week, when the Hungarian government was supposed to send the letter to the EC addressing the rule of law issues. Later on, the yield corrected and the spread to 10Y ROMGBs stabilized at 50bp. This week, Romania will reopen ROMGBs 2027, while Hungary will offer T-bills on top of regular bond auctions.

Read Forex Technical Outlook: EUR/USD, USD/JPY, USD/CHF

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