USD: BBDXY - Fails Above 1200 A Second Time, Ignoring Hawkish Fed Speak
The BBDXY range overnight was 1195.85 - 1199.48, Asia is currently trading around 1196, -0.01%. The USD stalled just above 1200 for the second time and drifted lower in the overnight session. Price action stood out in that we had some clearly hawkish Fed speak relative to market expectations which the USD completely ignored. Was that the extent of the bounce ? If so, it's a pretty poor effort. Should the market stay below 1200 then the focus will again turn back to the pivotal support back towards the 1180 area.
- Bloomberg - “Musalem, Bostic, and Hammack were leaning on the more hawkish side,” said Macquarie’s Thierry Wizman. “I am surprised that the USD is weakening and stocks are rising. It seems as if no one really believes the Fed or Powell when they admonish the market for thinking that there are 4-5 more rate cuts on the way.”
- Robin Brooks on X: “The last big catalyst for Dollar downside was Jackson Hole and Powell's very dovish speech. But that bullet has now been fired, so now it's up to the economy and whether we really go into recession. If we do, the Dollar falls further, but if there's no recession the Dollar rises.”
- “Aroop Chatterjee, a strategist at Wells Fargo, while warning that “further deterioration in fundamentals or Fed institutional credibility could renew downward pressure” next year. “If the Fed retains operational independence, the USD may remain resilient,” he said. “However, if the administration succeeds in reshaping the FOMC’s voting balance, markets could increasingly price in a compromised Fed in 2026” - BBG
Fig 1: BBDXY 2H Chart
Source: MNI - Market News/Bloomberg Finance L.P
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FED: NatWest Now Sees Cuts In 2025, Starting In September
As with Deutsche earlier, NatWest has changed its Fed call after the Powell Jackson Hole speech to reflect a 25bp September cut. Previously, the call was for no cuts in 2025. The new baseline outlook includes further 25bp cuts in December and March, bringing rates closer to neutral ("however, the changing composition of the committee becomes far less clear once Powell term expires in May").
- "While the August jobs and CPI reports will be watched carefully, it is clear to us that Powell has already seen enough to decide renewed action to counter downside economic risks is likely warranted, and so we now look for a 25 basis point rate cut on September 17th.
- "We expect officials will very much downplay the likelihood of a 50bp rate cut leading up to the jobs data, but we have to admit if the report is "weak enough" (e.g., the unemployment rate increases by 0.3pct to 4.5% (where officials had it at year end) anything can happen and wouldn't rule anything out. However, given the latest pivot and with financial markets pricing (86% of a 25bp rate cut) a lot has to happen (unemployment rate 3-handle and core CPI +0.5%) for the FOMC to undeliver and hold off from a rate cut in September. "
USDCAD TECHS: Bull Cycle Hindered
- RES 4: 1.4111 High Apr 10
- RES 3: 1.4019 38.2% retracement of the Feb 3 - Jun 16 bear leg
- RES 2: 1.3968 High May 20
- RES 1: 1.3925 High Aug 22
- PRICE: 1.3840 @ 16:55 BST Aug 22
- SUP 1: 1.3794 20-day EMA
- SUP 2: 1.3769/22 50-day EMA / Low Aug 22
- SUP 3: 1.3576 Low Jul 23
- SUP 4: 1.3557/40 Low Jul 3 / Low Jun 16 and the bear trigger
Gains this week in USDCAD and the breach of resistance at 1.3879, the Aug 1 high, marked a positive development, however the slippage into the Friday close undermines this sentiment - for now. Moving average studies have crossed and are in a bull-mode position, reinforcing current conditions. An extension higher would signal scope for a climb towards 1.4019, a Fibonacci retracement. On the downside, support to watch lies at 1.3769, the 50-day EMA - a level not yet challenged by the correction lower.
CANADA: Q2 Expected To See GDP Contraction, BOC's Estimate Looks Too Negative
The June retail sales release helps wrap up the last major data before Canadian Q2 GDP is released on Friday August 29.
- Current Bloomberg analyst consensus shows Q2 is expected to show a 0.7% Q/Q annualized contraction, versus +2.2% in Q1. The private sector consensus is more optimistic than the Bank of Canada's -1.5% estimate in its July Monetary Policy Report (which MNI thinks is too low) but the component-by-component breakdown is similar if of differing magnitudes.
- Widely expected are: a softening in household consumption growth (+1.2% in Q1), with a pickup in government spending, continued weakness in fixed investment (-3.0% in Q1) though with residential outperforming business capital formation, and a reversal of Q2's positive contribution from net exports. In short, the data are expected to confirm that trade activity was brought forward to Q1 ahead of tariffs, with the effects reversing in Q2.
- Going forward, the BOC envisages growth resuming in Q3 (+1.0% in its "current tariff" scenario). In the meantime, a weak Q2 reading could provide Governing Council with more conviction to resume easing rates in September, with the July meeting decision noting "If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate".
