Sterling climbs to highest level since March 2022 against U.S. dollar.

"The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks," Powell said in his speech as the dollar fell to new lows on the back of his remarks.

Federal Reserve Chair Jerome Powell indicated that while the direction of monetary policy is becoming clearer, the timing and extent of interest rate cuts will depend on incoming economic data, the evolving outlook, and associated risks. Speaking at the annual economic symposium in Jackson Hole, Wyoming, Powell suggested that the time for rate cuts has arrived, as growing risks to employment leave little room for further economic weakness, and inflation is close to the Fed's 2% target.

Powell’s remarks were enough to support market sentiment without causing alarm, leading traders to increase their expectations for a larger rate cut in September. The likelihood of a 50-basis point cut next month rose to 37%, up from 25% the previous day, with traders also pricing in a total of 106 basis points in cuts by the end of the year.

As other major central banks are expected to lower rates soon, the dollar weakness continued on speculation of the Fed being first to cut, causing the pound to climb to a more than two-year high against the dollar. The pound was up 0.94% in the afternoon at $1.3211. It reached $1.32295, its highest since late March 2022 after surpassing the 2023 high of $1.3144 driven by strong UK economic data and Powell’s dovish comments.

Positive economic indicators, such as a near three-year high in British consumer confidence, supported the pound’s rally. The currency has recovered significantly since its record low in September 2022, though it remains well below its pre-financial crisis peak in 2007.

I think this signals the recent signals of strength in the UK economy and dovish comments from Federal Reserve Chair Jerome Powell that sent the dollar sliding against several global currencies.

Attention now shifts to Bank of England Governor Andrew Bailey, who echoed Powell’s cautious approach. Speaking at a central banking conference organized by the Federal Reserve, Bailey noted that while inflation pressures seem to be easing, it’s too early to declare victory. He reiterated that the BoE would proceed cautiously with further rate cuts, as inflation risks still linger.

Powell’s remarks led to a decline in the dollar, with the dollar index dropping 0.5%. The euro, yen, Swiss franc, Canadian dollar, Australian dollar, and New Zealand dollar all gained against the greenback.

The dollar index dropped 0.5% after Powell said "the time has come" to adjust policy and promised to do all he can to avoid further weakening of labour markets.

The euro ended up 0.75% at $1.1195, just below an afternoon high of $1.12015, a price not seen since July 20, 2023.

The Japanese yen strengthened, with the dollar down 1.36% at 144.27 after the Fed news and Bank of Japan Governor Ueda's comments on rates.

Against the Swiss franc, the dollar weakened 0.52% to 0.848 francs. Dollar/Canada fell 0.82% to C$1.3511.

The Australian dollar strengthened 1.36% to US$0.6795. The kiwi strengthened 1.53% to $0. 6229.

In financial markets, U.S. Treasury yields fell, and global stocks rose, with major indices like the Dow Jones, S&P 500, and Nasdaq nearing record highs. European and Asian markets also saw gains. Meanwhile, oil prices rebounded, and gold prices approached record highs, reflecting continued uncertainty in the global economy.

U.S. Treasury yields fell broadly, while Wall Street and global stock markets surged on Friday, nearing record highs. This market movement followed a speech by U.S. Federal Reserve Chair Jerome Powell, confirming that the United States is on the verge of cutting interest rates.

On Wall Street, the Dow Jones Industrial Average increased by 1.14% to 41,175, the S&P 500 gained 1.15% to 5,634 close to its all-time high and the Nasdaq Composite rose 1.47% to 17,877.

In Europe, the broad STOXX 600 index climbed by approximately 0.5%, reaching its highest level in over three weeks and marking its third consecutive week of gains. Meanwhile, Asian shares outside Japan edged down 0.1%, but Japan's Nikkei advanced by 0.4% as investors assessed inflation data and comments from Bank of Japan Governor Kazuo Ueda, who indicated a readiness to raise interest rates if economic and inflation forecasts materialize as expected.

These movements lifted MSCI's all-country world index by about 1.1%, placing it slightly above its mid-July all-time high, with the turbulence of early August now behind.

The yield on U.S. 10-year Treasury notes dropped by 5.9 basis points to 3.803%, down from 3.862% on Thursday. The 2-year note yield, which is closely linked to interest rate expectations, fell by 9.7 basis points to 3.9132%, down from 4.01% on Thursday.

In the commodities market, oil prices surged by more than 2%, recovering from earlier losses in the week due to rising U.S. crude inventories and concerns over weakening demand in China. Gold prices also increased by about 1.1%, reaching $2,510 an ounce, close to the record high of $2,513 set earlier in the week.

In the current environment of a weakening dollar it's important to protect margins or if you're on the right side of this move enhance your purchase power. We can help! Message me to connect and speak to myself or one of our currency specialists.

The Week Ahead

In the week ahead, currency markets are expected to be influenced by several key factors.

Central Bank Policies: Any updates or guidance from the U.S. Federal Reserve and European Central Bank regarding interest rates will likely drive currency movements, particularly for the USD and EUR.

Economic Data: U.S. GDP growth, Eurozone inflation, and consumer confidence reports will provide crucial insights, impacting major currency pairs.

Geopolitical Tensions: Ongoing geopolitical issues, especially in Europe and the Middle East, could lead to volatility, particularly in safe-haven currencies like the JPY and CHF.

The U.S. dollar's movement will be heavily influenced by the next set of non-farm payrolls report and the ISM manufacturing index. Any signs of a cooling labor market or slowing economic activity might increase speculation about further rate cuts, potentially weakening the dollar.

Additionally, remarks from Federal Reserve officials could offer more clarity on the central bank’s stance, which could drive dollar volatility.

The euro will likely be swayed by Eurozone inflation data and the European Central Bank meeting minutes. If inflation remains high, it could support expectations for the ECB to continue its tightening cycle, giving the euro a boost. Conversely, signs of economic weakness or dovish signals from the ECB could weigh on the currency.

The pound will be under scrutiny as the Bank of England hones in on the economy and global interest rate speculation. Traders will be looking for any indications of the BoE’s future rate hikes, especially in light of persistent inflationary pressures.

The Japanese yen's performance will be shaped by domestic economic indicators, including consumer spending and industrial production data. Market participants will also keep an eye on comments from the Bank of Japa, especially after recent signals that the BoJ may consider tightening monetary policy if inflation continues to rise.

The Australian dollar, Canadian dollar, and New Zealand dollar will be impacted by global commodity price movements and economic data from China, a major trading partner for Australia and New Zealand. Any signs of a slowdown in China could weigh on these currencies.

Overall, currency markets are likely to experience volatility as traders react to these economic events and central bank signals. With global economic uncertainty and geopolitical risks still in play, safe-haven currencies like the yen and Swiss franc could see increased demand in times of heightened risk aversion.