The annual gathering of central bankers in Jackson Hole, US, is under way and the risk to watch is if US Federal Reserve chair Janet Yellen uses this as a platform to shake market expectations. If Yellen indicates the US economy may be strong enough to warrant a rate hike as soon as September, then a stronger US dollar could advance in coming weeks.
However, weak US GDP data yesterday were followed by more dovish signals from the Fed chair after her speech could see the US dollar come under renewed selling pressure. One would therefore not rule out GBP/USD testing the $1.33-$1.335 range over the bank holiday weekend.
Sterling
Dovish signals from Ms Yellen, meaning traders will start to rule out any chance of a near-term US rate hike, could weaken the US dollar and provide further support for the Euro. This could see the pound fall back towards a multi-year support area against the euro around €1.16.
On the upside for the pound, we are seeing a real interest in EUR buy orders from corporates in the €1.18-€1.19 price area. The average forecast, taken from banks in the latest Reuters Poll, points to the pound trading around €1.1640 by November. The BOE’s next rate decision is on September 15.
Euro
Euro traders were yesterday overlooking Italy’s major earthquake and Thursday’s markedly weaker-than-expected German IFO business index to focus really on the US interest rate news and speech. But it is important to note that Thursday’s IFO index showed the biggest monthly drop in the index since 2012 on Brexit worries.
Focusing on the Fed, if traders sense reluctance from Yellen to hike interest rates at the next policy meeting on September 21, then it is possible for the euro to make another sustained attempt to rise towards $1.14 against the USD in early September.
A markedly stronger Euro in September, to the surprise of many forecasters, could mean another lurch lower in the GBP/EUR rate towards €1.15 which has been a major support zone over the past three years. The ECB’s next monetary policy decision is on September 8.