LDN - Business

Currency markets in subdued mood ahead of key Fed speech

[August 26, 2020] By Julien Ponthus

LONDON (Reuters) - The dollar and the euro traded cautiously on Wednesday as investors refrained from taking risky bets a day ahead of a key speech by Federal Reserve Chairman Jerome Powell.

Amid growing speculation Powell could unveil a softer policy stance towards inflation at the annual Jackson Hole retreat on Thursday, investors are bracing for the Fed's possible new steps to prop up the U.S. economy.

"Targeting average inflation over time rather than setting a fixed 2% goal would likely mean lower rates for longer", said Raffi Boyadjian, senior investment analyst at online broker XM.

"Hence, if the Fed confirms such a move, the greenback would stand little chance of a meaningful rebound anytime soon", he added, calling the mood in currency markets "somewhat subdued" due to the uncertainty.

Both a policy change announcement or the lack of are expected to resonate strongly across trading floors.

"Either the Chairman drops something juicy for "reflationistas" (aka USD bears) or the USD rips higher for a few weeks", Stephen Innes, chief global markets strategist at AxiCorp, wrote in a morning note.

"I would never bet against the Fed sounding dovish during an easing cycle", he added.

The dollar index, which tracks the greenback's value against a basket of currencies <=USD> was up 0.1% at 93.11 after taking a hit on Tuesday following data showing U.S. consumer confidence tumbling to the lowest in more than six years.

Data later on Wednesday is forecast to show growth in U.S. durable goods orders slowed in July, highlighting policymakers' concerns about the economy.

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Rolled Euro banknotes are placed on U.S. Dollar banknotes in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration

"A softer-than-expected figure should revive the Fed doves, while a better-than-expected read would improve the investor mood, but should not have a material impact on dovish Fed expectations as it is clear to everyone that the economy needs sustained support for posting good results," Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, told her clients.

Against the euro <EUR=D3>, the dollar stood at $1.1818 following a 0.4% decline in the previous session.

The yuan rose toward a seven-month high at $6.8908 after U.S. and Chinese trade officials reaffirmed their commitment to a Phase 1 trade deal, which eased concerns about a diplomatic standoff between the world's two-largest economies.

The British pound <GBP=D3> bought $1.3135 having risen 0.7% against the dollar on Tuesday.

Sterling has managed to shrug off a lack of progress in trade negotiations between Britain and the European Union.

The dollar was locked into a narrow range against the yen, last trading at $106.23 <JPY=EBS>.

Graphic: World FX rates in 2020 https://graphics.reuters.com/
GLOBAL-CURRENCIES-PERFORMANCE/
0100301V041/index.html

(Reporting by Julien Ponthus; Editing by Toby Chopra)

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