Powell pledges sustained inflation fight.

Fed Chair Powell stated that July’s lower inflation reading was welcome, but fell short of what is required before the Fed is sure that inflation is declining. He added that benchmark rates at 2.50% is not a place at which to stop or pause the process of raising interest rates.

Powell added that lowering inflation is likely to necessitate an extended period of below-par growth and there are unfortunate costs of reducing inflation, but falling to restore price stability would mean far greater pain over the medium term. According to Powell, a tight monetary policy is likely to be needed for some time.

As far as September is concerned, Powell stated that the decision will be based on the totality of data since the July meeting.

Following Powell’s comments, markets pared back expectations of a Fed Funds rate cuts in 2023 with rates expected to stay higher for longer.

The 2-year yield increased to the highest level since 2007 and close to 3.50% with the 10-year yield above 3.00%.

Following Powell’s comments and hawkish rhetoric from other Fed officials, the dollar posted a 20-year high on a trade-weighted basis as it surged against all major currencies.

There was a limited dollar correction from highs on Monday.

With Europe facing increased inflation pressures, there has been speculation that the ECB will increase interest rates by 75 basis points at the September policy meeting.

This speculation provided an element of Euro protection.

Japanese Finance Minister Suzuki stated that market moves post Jackson Hole are being monitored closely and there were some reservations over pushing the yen even weaker given the possibility of intervention.

The latest German consumer prices data is due on Tuesday with expectations that the year-on-year rate will increase to 7.8% from 7.5% and just below the record high of 7.9%.

The Euro-Zone data will be released on Wednesday.

The Euro gained some support from speculation that the ECB could increase interest rates by 75 basis points at the September meeting. There were still important concerns surrounding the Euro-Zone energy sector with fears over gas prices. The Euro gained some net support on the crosses. EUR/USD peaked at 1.0075 on Friday before sliding on Powell’s comments.

Higher US yields provided strong support for the dollar. There were some reservations surrounding the US economy. EUR/USD dipped to lows at 0.9915 before rallying to 1.0000.

USD/JPY posted 2-month highs around 139.00. Intervention concerns curbed the potential for further yen selling with USD/JPY around 138.50.

Higher yields elsewhere undermined the Swiss franc. EUR/CHF strengthened to 0.9680 with a USD/CHF peak above 0.9700.

Underlying Sterling sentiment continued to deteriorate amid fears over the outlook. GBP/USD slumped to a 2-year low around 1.1650 on Monday with UK markets closed before a limited recovery to 1.1700.

Commodity currencies dipped sharply on Friday after the dollar surge and slide in equities before a tentative recovery. AUD/USD dipped to lows below 0.6850 before rallying to near 0.6900. USD/CAD peaked at 1.3075 before a retreat to near 1.3000.

Economic Calendar

13:00GER Inflation Rate YoY Prel AUG7.50%
15:00US JOLTs Job Openings JUL10.5M10.698M

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.