White House drama steals limelight from Jackson Hole as politics trumps economics for the politically paralysed USD
There is little love lost for the dollar right now, with the currency fast becoming a sell on the current White House drama. It is a bit strange to see both speculative and actual personnel changes within the White House causing such a stir for global markets, though we may be able to put this down to summer markets. Still, we prefer to focus on the broader economic implications of US politics and what this means for the dollar.
In addition to diminishing odds of any pro-growth policies from the Trump administration, we believe the narrative is shifting towards political uncertainty having a dampening effect on business confidence and investment activity. Given that US political environment remains frenetic, the risk relief rally seen late on Friday may prove to be short-lived and this could well keep the dollar pinned down over the coming weeks.
It looks like top central bank officials - including ECB President Mario Draghi and Fed Chair Janet Yellen - will remain tight-lipped over future policy plans at Jackson Hole this week, with a big picture focus on central banking and the global economy removing any significant event risk for markets. While Draghi will undoubtedly sound more upbeat on the prospects for the Eurozone economy relative to his 2014 Jackson Hole speech, we do think the ECB chief will be more careful with his choice of words when speaking in Lindau (Wednesday) and Jackson Hole (Friday) this week. Indeed, the July minutes expressed concerns over a possible front-running of ECB policy normalisation within markets, which to some extent highlights the current market-sensitive nature of central bank talk.
Despite taking this verbal hit from the ECB last week, the EUR continues to show the resilience of a boxer refusing to go down; at this stage, it may be as much to do with a politically paralysed USD than it is the inability of a major central bank to effectively talk down its currency. We remain tuned to see what unfolds next in the ongoing White House drama.
In the absence of any surprise ECB or Fed policy news at Jackson Hole this week, there will be little impetus for EUR/USD to breakout of the narrow 1.17-1.18 trading range this week.
Fluctuating external conditions makes trading the dollar bloc currencies fairly difficult and we wouldn't be surprised if 'a lack of conviction' is currently the default mindset
Scandinavian central banks remain comfortable looking through any positive domestic data as policymakers look to the ECB for guidance over unwinding super loose monetary policy.