(Eren Sengezer – FXStreet)
– Annual PCE inflation in the US is expected to rise to 7.4% in July.
– Markets are likely to wait for Powell’s speech at the Jackson Hole Symposium.
– DXY could move in either direction depending on the market pricing of the next rate hike.
It will be trickier than usual to trade the Personal Consumption Expenditures (PCE) Price Index PCE data on Friday because we have FOMC Chairman Jerome Powell’s speech coming up at the annual Jackson Hole Symposium.
When the July Consumer Price Index data came in below market expectations on August 10, the US Dollar Index lost more than 1% on the day. Since then, however, the index gained nearly 3%.
The annual PCE Price Index is expected to rise to 7.4% from 6.8% in June and the annual Core PCE Price Index, the Fed’s preferred gauge of inflation, is forecast to edge lower to 4.7% from 4.8%.
If the annual PCE inflation falls below 6.8% instead of rising to 7.4%, that could lead to a dollar selloff. A big decline in the annual Core PCE Price Index to the area of 4.3% would probably have a similar impact on the USD’s valuation.
On the other hand, a reading near the market expectation of 7.4% in PCE inflation, regardless of the core PCE inflation, should provide a boost to the dollar.
Even if a soft PCE inflation print were to weigh on the dollar, Powell’s remarks could change the currency’s direction. Hence, markets are likely to stay cautious and refrain from committing to big positions.
Eyes on Powell
One of the reasons why the dollar started rallying last week was hawkish Fed commentary and markets saw that as a sign that Powell could double down on the hawkish policy outlook when he speaks at the Jackson Hole Symposium. There are a few different scenarios to look at:
Hawkish: Powell pushes back against the market expectation of the Fed turning dovish next year and reiterates that they will not give up on policy tightening on the first sign of inflation slowing down. The strong/tight labor market should allow the Fed to reject the idea of a deep recession in the US. Such a tone would suggest that the policy divergence between the Fed and other major central banks, especially the Bank of England and the European Central Bank, could continue to widen. In my opinion, though, the latest dollar rally suggests that markets have already priced in hawkish Powell remarks. Unless Powell says that frontloading rate hikes will continue and that they are leaning toward another 75 basis points (bps) hike in September, the dollar could have a hard time gathering bullish momentum.
Neutral: Powell says they are data-dependent and they are yet to decide on the size of the next rate increase. That would raise the significance of the August employment and inflation data releases and hurt the dollar. The fact is that the latest PMI surveys suggest that price pressures continued to ease in August. Also, Cleveland Fed’s monthly inflation nowcasting model expects little to no inflation in August.
Dovish: Powell acknowledges the slowdown in growth and sounds more concerned about the outlook than before. Even if he says something along those lines, he is likely to remind markets that their priority is to battle inflation. Nevertheless, he could also see the latest inflation data as encouraging development and mention signs of normalization in supply chains. Finally, any hints that they are likely to hike the policy rate by 50 bps in September rather than 75 bps would be a significant dovish shift.
To summarize, I expect the dollar to lose strength whether Powell adopts a neutral or a dovish tone. In the dovish scenario, I would expect a longer-lasting retreat in the US Dollar Index (DXY) than we would see in the neutral scenario. The only scenario for an extended dollar rally would need to include a very firm hawkish stance that can lift the 75 bps rate hike probability even higher for September.