FX Market Update: US Dollar Retreats Ahead of Jackson Hole Summit

US dollar falls ahead of Jackson Hole Symposium

The US dollar index continued falling as hopes of Federal Reserve rate cuts continued. It fell to a low of $102.40, down by almost 4% from its lowest point this year.

The dollar will be in the spotlight this week for two important things.

First, the Federal Reserve will publish minutes of its last meeting on Wednesday. Historically, these minutes provide more color about the previous meeting by illustrating key deliberations that happened.

Second, the Kansas Fed will hold the important Jackson Hole Symposium in Wyoming later this week. This is an annual where central bank officials meet and share more information about their actions.

Historically, this meeting has provided a good platform for the Federal Reserve to provide more details about the next actions. In this case, the Fed Chair will likely confirm that the bank will start cutting rates as soon as in the September meeting.

What is now clear is that the Fed may not cut rates by 0.50% as some analysts have been predicting because recent data have been a bit positive about the US economy. Initial jobless claims have been strong and so did the recent retail sales data.

In a note, analysts at ING said:

The implied probability for such a bigger move is now down to below 20%. The base case is now 25bp easing in September with a bit over 90bp of easing discounted until year-end.

ING

The US dollar tends to underperform other major currencies when the Fed has embraced a dovish tone. This happens because a dovish tone leads to more risk appetite, which pushes investors to invest in other countries.

South Korean won rises ahead of central bank decision

The South Korean won has bounced back in the past few months, helped by the rising demand for semiconductors. The USD/KRW exchange rate has dropped to 1,350, its lowest level since May 16th and down by over 3.6% from its highest point this year.

This retreat has coincided with the comeback of some other Asian currencies like the Japanese yen and the Taiwanese dollar. The currency will be in the spotlight this week as the country’s central bank delivers its interest rate decision on Thursday.

The central bank will likely leave interest rates unchanged at 3.5% for the thirteenth consecutive meeting. It will also maintain a fairly hawkish tone since the country’s inflation has started rising again.

The most recent data revealed that South Korea’s inflation rose to 2.6% in July from 2.4% in the previous month. Analysts expect that the central bank will cut interest rates by 0.25% later this year if the Fed makes its first move.

South African rand rallies

The South African rand was the other currency that caught our eye as its surge gained momentum. The USD/ZAR exchange rate dropped to a low of 17.80 on Friday, its lowest swing since August 1st last year. It has fallen by 7.8% from its highest level this year and by over 8% from its 2023 highs.

The most recent catalyst for the currency is the unity government by the Africa National Congress (ANC) and the Democratic Alliance (DA) party. The agreement has held strong and analysts expect that the stability could lead to more investments in the next few years.

Also, the pair has risen because of the rising hopes that the Fed will make the first move of cutting interest rates than the South African Reserve Bank (SARB).

The South African rand, which is often seen as the bellwether of emerging market currencies, tend to do well when the Fed is cutting rates. Still, analysts expect the SARB will also start cutting rates later this year if inflation continues falling. The most recent economic data revealed that the country’s inflation eased to 5.2% in June.

Swedish krona gains ahead of Riksbank decision

The Swedish krona has risen against the US dollar and the euro in the past few weeks. The EUR/SEK exchange rate retreated to 11.50 from the year-to-date high of 11.77.

This price action happened as the European Central Bank (ECB) and the Riksbank, the world’s oldest central bank, started cutting interest rates. Riksbank made its first cut in March as the country’s economic weakness continued.

The central bank will meet again this week and the most likely scenario is where it maintains status quo since inflation has started rising recently.

Its decision will come a week after the Norwegian central bank left rates left rates unchanged at 4.5% and hinted that it will take time to cut rates. The bank, and some politicians, have become highly concerned about the krone’s weakness and have suggested pegging it to to the euro.

Euro rises ahead of inflation report

The euro continued rising against the US dollar mostly because of the rising odds of Federal Reserve cuts. This week, the EUR/USD pair will react mostly to the final estimate of Europe’s inflation data on Tuesday.

Economists, based on the preliminary report released in July, expect the data to show that the headline CPI rose to 2.8% in July from the previous 2.5%. Core inflation is expected to have remained at 2.9%. The base case among analysts is that the ECB will deliver two or three 0.25% rate cuts this year.