USD idles in low-vol range trade – Scotiabank

Amidst low market volatility, investor attention is squarely on Fed Chair Powell's upcoming Jackson Hole speech for signals on potential rate cuts, even as policymakers face unresolved uncertainties that may limit clarity. Swaps currently price in 20-21bps of easing for the September contract following recent inflation data. The USD is narrowly mixed, with Scotiabank forecasting a long-term negative outlook for the dollar due to anticipated Fed easing and slowing US growth, while expecting short-term range trading.

Analysis

Current market conditions are characterized by low volatility and summertime trading dynamics, with investor focus shifting away from geopolitical news towards the pivotal Jackson Hole symposium. The key event is Fed Chair Powell's speech on Friday, which is being closely watched for any signals of forthcoming rate cuts, similar to the forward guidance provided in his 2024 remarks. However, the analysis from Scotiabank suggests Powell may be unable to provide significant clarity on the policy outlook due to unresolved uncertainties. This anticipation of monetary easing is already being priced into the derivatives market, with interest rate swaps reflecting 20-21 basis points of cuts for the September contract. In the currency markets, the US Dollar index (DXY) is expected to remain range-bound in the short term. The longer-term outlook for the USD is negative, based on the view that the Federal Reserve will eventually ease policy, while inflation remains sticky, US growth slows, and the nation's fiscal policy is considered unsustainable.

Key Decisions for Investors

• Investors should exercise caution and consider neutral positioning in the near term, as the USD is expected to be range-bound with low volatility ahead of Friday's key speech.
• The primary catalyst for market movement will be any deviation in Chair Powell's guidance from the 20-21bps of easing already priced into September swaps; a more dovish or hawkish tone will likely introduce significant volatility.
• For those with a longer investment horizon, the fundamental analysis suggests considering strategies that would benefit from a weaker US Dollar, given the long-term outlook of eventual Fed easing, slowing growth, and unsustainable fiscal policy.