Why the dollar slumped following Jerome Powells speech

The dollar took a turn for the worse following Federal Reserve Chairman Jerome Powell’s speech at Jackson Hole. Whilst the Fed Chair continued with his upbeat assessment of the US economy, and strong inflation, he added a level of constitutionality to further hikes, putting a dovish spin on highly anticipated speech.

There was no change in policy from Jerome Powell, therefore the Fed will remain on the same path of gradual rate rises, which means a hike in September and a hike in December. There was no discussion by Powell on what the neutral rate might be. Neither was there any extra commentary of recent risks brought up in the FOMC minutes, such as Trump’s trade policy, the housing market or merging markets. 

However, Powell did identify two risks: “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating”. He insisted that the Fed was taking both of these risks seriously.

However, he also stated that the Fed sees no signs of the economy overheating and inflation pushing beyond 2%. With no acceleration in inflation expected, Fed Powell effectively poured cold water on any trader optimism over more aggressive tightening in the year ahead. Whilst the two hikes this year appear firmly in the Fed’s plan, still little is known about what 2019 could hold.

The dollar, which had been gradually grinding lower overnight dropped sharply on Fed Powell’s comments.

Whilst the Euro was trading over 0.7% higher versus the weaker dollar, the pound was unable to capitalise in the same way as Brexit jitters continued to weigh on sentiment for sterling. The pound was trading just 0.3% higher moving towards the end of the European session.

Risk on despite no progress in US – Sino trade talks
Equities were trading higher across the board, Wall Street driving higher on the prospect of a slightly less hawkish Fed, overshadowing the lack of progress in US – Sino trade talks which concluded yesterday with little progress. 

On the FTSE the miners were leading the charge higher, shrugging off the escalating trade tensions. A ratings upgrade for Antofagasta in addition to copper hitting a four-week high lifted sentiment towards the sector. 

House builders were on the back foot as data showed that mortgage approvals fell in July plus Rightmove figures showed a drop-in house prices, proving to be a toxic combination for the sector.