September FX Consensus Forecast

September FX Consensus Forecast

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September FX Consensus Forecast

The outburst of the Delta variant kept the global markets sour through the course of a turbulent month of August. A resilient and more contagious strain of the virus has put to the test the efficiency of the vaccines and the market morale, especially after recent studies indicated that the vaccine-induced immunity fades over time, looming out the risk sentiment in global markets. The combination of i) Covid cases refusing to ease, ii) the global impact of the third wave, and iii) the uncertainty around the repercussions over the economy, has sponsored a broader appreciation of the greenback amid risk aversion. 

The lingering effect of the Delta variant diminished confidence levels across the economy. The University of Michigan releases a monthly survey on consumer attitudes, representative of U.S. household's consumer confidence excluding Alaska and Hawaii. The index posted the worst readings in over a decade given the pressures arising from increasing covid cases in the U.S., in addition to market uncertainty around policymakers removing the stimulus. However, the approval of the Pfizer/BioNtech vaccines announced by the FDA, gave an additional boost of confidence as infections have mildly started to ease, while the vaccine rollout will pick up pace thanks to the rubber stamp from health authorities in the United States activating new distribution channels. 

Moreover, it is worth considering that interventions from Central Banks continue to distort and affect capital flows. The Swiss National Bank filed to the CFTC the purchase of over USD 162 billion dollars in U.S. stocks, with the intent to depreciate their own currency against the greenback. The Swiss Franc has rallied significantly due to its safe-haven appeal and it has affected the competitiveness of Swiss exports while creating a drag on the country's inflation. However, U.S. equity markets continue to flourish within the Covid chaos, building momentum aided by the deployment of Swiss stimulus and the U.S. government approving a USD 1 trillion infrastructure bill, keeping the party going for equity investors. Nasdaq and S&P 500 stock indexes rallied over 3% in August despite the sour mood, as it seems the market is running on steroids taking into consideration the different players involved.  

The Federal Reserve continues to support the economy through the monthly purchase of over USD 120 billion worth of bonds while keeping interest rates at record lows in an effort to reignite the economy from the impact of lockdowns and Covid measures. The stimulus program was promised to be deployed until “substantial further progress” has been made on Unemployment and Inflation. Policymakers have granted that in reference to inflation, sufficient progress has been made, ahead of unemployment, which has started to produce signs of recovery. The latest unemployment figures break the 6% mark in its latest release, posting 5.93%. However, shortages and bottleneck effects due to disruptions in the supply chain have pushed inflation higher than previously anticipated, flagging that the economy might be overheating. The Consumer Price Index has progressively picked up from 1.7% annualized in February reaching 5.4% in June and these levels have been sustained during the course of July, suggesting pressures have stabilized. 

The Chairman of the Fed, Jerome Powell has constantly referred to inflationary pressures as transitory and that these are expected to ease as supply chain disruptions restore and the impact of the virus fades. Nevertheless, the sustained inflation had its own impact over interest rate hike expectation, bringing them forward after Jerome Powell firstly hinted at tapering the stimulus programme back in July. Investors are now pricing in interest rate hikes by the first half of 2022. As policymakers are looking at withdrawing stimulus from the economy, the resilient Delta variant seems to have finally slowed down the pace of infections by the end of August. Uncertainty and diminished market morale kept markets on the verge of their seats as jittery flows found refuge on the greenback, especially after tapering comments pushed Treasury Yields higher adding to the dollar attractiveness. The U.S. dollar index, a tool used to benchmark the greenback against a basket of six major currencies, appreciated over 2% during the first two and half weeks of August; and retracing back as tapering uncertainty faded away after the speech of Jerome Powell at the Fed’s showdown. 

The Jackson Hole Symposium had an instrumental role in the latest retracement of the greenback where we confirmed that Jerome Powell is a strong dove and we learned that he is surrounded by FOMC members shifting to a hawkish stance. Interventions from Kaplan and other Fed members supported immediate action on tapering the bond purchase program, which should start adding pressure over Powell’s reluctance to withdraw stimulus. Despite Powell defending the bank's monetary policy, there were clear indications that tapering will begin by the end of 2021 or beginning 2022. However given the worrying circumstance and spread of the virus, he committed to easing money refraining from any immediate action. The Chairman also made a comment flagging that we shouldn’t expect interest rates to move and that those are very different topics of conversation. The dovish stance from Powell has welcomed news from market participants extending gains over the equity market while the dollar is looking to close out the month in a subdued tone. The upcoming job reports will be fundamental in order to witness an announcement of tapering in September, meaning that if Nonfarm payrolls fail to impress, we could expect the FOMC to roll its tapering decision for another month and extend further losses on the greenback.    

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