IFX Market Report: Tuesday 30th August 2022

The United States Federal Reserve Symposium came to an end this weekend in Jackson Hole, Wyoming. The gathering saw federal reserve directors and key financial deciders meet to discuss the economic situation, and in particular inflation this year as it stands at 8.5% in July. Fed Chairman Jerome Powell led a speech on Friday, stating that the central bank will continue to increase interest rates as needed to fight inflation, and that central banks should take responsibility in fighting inflation. He also added that the interest rates will likely persist for some time as “the historical record cautions strongly against prematurely loosening policy.”

However, a document from the same event in Jackson Hole by researchers Francesco Bianchi of John Hopkins University and Leonardo Melosi of the Chicago Fed suggest that raising interest rates will not be enough. The document argues that fiscal intervention in response to the Covid-19 pandemic led to fiscal inflation. Therefore, drafting a fiscal plan will be as instrumental in fighting inflation as interest rates. The researchers believe the Fed can bring down inflation “only when public debt can be successfully stabilized by credible future fiscal plans”. Without any fiscal constraint, rates hikes are only going to increase the cost of debt and drive inflation expectations higher.

The monthly US jobs numbers, to be released on Friday, will be closely watched for further clues to the interest rate outlook. The dollar index - which measures the greenback against a basket of six currencies, with the euro being the most weighted - stood at 108.50 in Asian trading, after falling from 109.24 in the night, a level not seen since September 2002.

The euro was also helped by a pullback in gas prices in Europe after German Economy Minister Robert Habeck said the country was filling up gas storage facilities faster than expected. However, euro yields remain unattractive and the worsening gas crisis in Europe means that the expected more aggressive ECB hikes would only deepen the recession.

Cable saw the dollar strengthen with inflation expectations reaching as high as 18% in the United Kingdom. GBPUSD opened at 1.1824 and closed at 1.1747, a -0.68% fall for the pound after the -2.50% loss the week before. The pound lost already 13% against the US dollar since the beginning of the year.

GBPEUR saw the pair stabilize last week. It opened at 1.1781 and closed at 1.1788.

EURUSD continued on its downfall last week with -0.73% fall after -2.13% the week before. The pair opened at 1.0041 on Monday and closed below the parity line at 0.9961 on Friday.

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