22/08/2025 Market Watch

Dollar Consolidates Ahead of Powell

Key Takeaways:

  • Dollar stalls ahead of Powell’s Jackson Hole speech.
  • Greenback posts broad weekly gains against G10 currencies.
  • Yields in Japan, UK, and US push to multi-month highs.
  • Asian equities rebound, led by strong gains in China.
  • Gold and oil trade softer after recent highs.

The dollar lost momentum on Friday after extending gains through the week, with traders awaiting Fed Chair Powell’s speech at Jackson Hole. The greenback advanced across all G10 currencies this week, with the Australian and New Zealand dollars, as well as sterling, down more than 1%. The yen and euro also weakened notably. In emerging markets, performance was mixed, though the Chinese yuan and Mexican peso managed to edge higher on the week.

Bond markets reflected renewed pressure from higher global yields. Japan’s 10-year JGB climbed five basis points to finish above 1.60%, the highest level since 2008. In Europe, benchmark yields were steady to slightly firmer, with the UK 10-year Gilt yield hitting 4.75%, its highest since May. In the US, the 10-year Treasury yield hovered near 4.34%, close to the month’s peak of 4.40%.

Equity markets in Asia found relief after recent losses, with the MSCI Asia Pacific Index breaking a four-day decline. Japan, China, and Hong Kong drove the advance, while China’s CSI300 surged 2.1% on Friday, marking a 4.2% weekly gain, the strongest since March. Europe’s Stoxx 600 extended its three-week rally to five-month highs, despite a minor setback on Thursday. In the US, futures traded higher after the S&P 500 suffered five consecutive daily losses.

Commodities struggled to sustain momentum. Gold softened near $3330, needing a close above $3336 to avoid a second weekly decline. Oil slipped back after October WTI touched $63.80, closing near $63.30 and holding above last week’s levels but below recent highs.

United States of America

Overview

The US economy delivered mixed signals last week. Stronger than expected preliminary PMI data and new home sales in July, alongside firmer existing home sales, offset the sharpest rise in weekly jobless claims in three months and a steep drop in the Philadelphia Fed survey. These developments pushed US rates higher by around five basis points, supporting the dollar. The Dollar Index climbed to a nine-day high near 98.85, achieving the 38.2% retracement of this month’s losses, but momentum slowed as it approached the 50% retracement level around 98.95.

Attention now turns to Fed Chair Powell’s address at Jackson Hole, which is expected to provide clarity on the Fed’s outlook. Powell is likely to acknowledge a shift in the balance between the central bank’s dual mandate and signal that less restrictive policy may be needed. Early estimates for August nonfarm payrolls point to job growth below 100k, underscoring a slowing labor market. However, conditions do not yet point to stagflation. The unemployment rate remains at 4.2%, while the Atlanta Fed’s GDP tracker projects growth above the long-term sustainable pace identified by policymakers.

Inflation trends also remain central. The PCE deflator, the Fed’s preferred gauge, is projected to hold steady at 2.6% in July. While still above target, it does not meet the criteria for stagflation. Similarly, concerns over fiscal dominance appear overstated, as the Fed has not shown signs of yielding to White House pressure to cut rates for debt-servicing relief.

Economic Drivers

  • Stronger than expected PMI, new home sales, and existing home sales data.
  • Largest increase in weekly jobless claims in three months.
  • Philadelphia Fed survey showing significant contraction.
  • Market anticipation of Powell’s Jackson Hole speech on economic outlook.
  • Early forecasts of nonfarm payroll growth below 100k, pointing to labor market cooling.
  • Unemployment rate steady at 4.2%, suggesting resilience in employment.
  • Atlanta Fed GDP tracker showing growth above long-term sustainable levels.
  • PCE deflator projected to remain at 2.6% in July.
  • No evidence of stagflation or fiscal dominance at present.

Data and Events

  1. 22 August 2025: Jackson Hole Symposium
  2. 22 August 2025: Fed Chair Powell Speaks
  3. 23 August 2025: Jackson Hole Symposium

Price Action

  • Dollar Index reached nine-day high at 98.85, meeting 38.2% retracement of monthly losses.
  • Resistance seen near 98.95 at the 50% retracement level.
  • US yields rose around five basis points, supporting the dollar.

Key Points:

  • Dollar Index hit nine-day high as US data surprised on housing and PMI.
  • Powell’s Jackson Hole speech in focus for policy signals.
  • Labor market shows signs of cooling, but unemployment remains stable at 4.2%.
  • Inflation remains elevated but not indicative of stagflation.
  • No clear evidence of fiscal dominance influencing Fed policy.

Canada

Overview

The US dollar is pressing higher against the Canadian dollar, extending its recovery for a fourth consecutive session and gaining in six of the past seven. The greenback climbed close to CAD1.3920, marking a three-month high, with near-term risk pointing toward the CAD1.4000–1.4035 range.

Attention is on Canada’s June retail sales report, which is expected to show a rebound following May’s 1.1% decline. Excluding autos, sales may have increased for the first time since February, which could temper expectations for an imminent Bank of Canada rate cut. Market speculation has risen in recent weeks, with investors betting the central bank may ease policy as soon as next month.

Despite this, the Bank of Canada retains flexibility given the economic disruptions still weighing on the outlook. With the Federal Reserve likely to continue its easing cycle, the Bank of Canada may have more room to adjust policy at its own pace. The swaps market now prices more than a 90% chance of a rate cut before year-end, compared with around 60% at the end of July.

Economic Drivers

  • US dollar strength against the Canadian dollar, driven by broad greenback recovery.
  • June retail sales expected to rebound after a 1.1% decline in May.
  • Ex-auto sales may rise for the first time since February.
  • Rising speculation of a Bank of Canada rate cut next month.
  • Swaps market now discounts over a 90% chance of a rate cut before year-end, up from 60% in July.
  • Federal Reserve expected to resume easing, giving the Bank of Canada more flexibility.

Data and Events

  1. 22 August 2025: Retail Sales

Price Action

  • US dollar climbed to nearly CAD1.3920, the highest in three months.
  • Near-term risk targets the CAD1.4000–1.4035 area.
  • Canadian dollar under pressure from stronger greenback momentum.

Key Points:

  • US dollar strength pushed USD/CAD to a three-month high.
  • June retail sales expected to rebound, with ex-auto sales possibly turning positive.
  • Market speculation of a near-term BoC rate cut remains elevated.
  • Swaps market prices over 90% chance of a cut before year-end.
  • Fed easing outlook gives BoC additional policy flexibility.

Europe

Overview

The euro initially rallied after stronger than expected preliminary August PMI data, which showed the first manufacturing reading above the 50 expansion threshold since Russia’s invasion of Ukraine in 2022. However, the gains were quickly reversed during the North American session as the dollar strengthened on robust US data and higher interest rates.

The widening yield gap between the US and the eurozone has placed renewed pressure on the euro. The two-year US premium over Germany has widened nearly 10 basis points since last week, reaching a monthly high near 183 basis points. This shift has reinforced dollar demand and weighed on the single currency.

Technically, the euro found initial support near $1.1600, which marked the 38.2% retracement of this month’s advance, but it has since broken below this level. It has so far held above the next retracement level at $1.1560, with nearby resistance capped between $1.1620 and $1.1630.

Economic Drivers

  • Preliminary August PMI data beat expectations, with manufacturing rising above 50 for the first time since early 2022.
  • Broader dollar strength on stronger US economic data and firmer interest rates.
  • US-Germany two-year yield spread widened by nearly 10 basis points to 183 basis points, favoring the dollar.

Data and Events

  1. 22 August 2025: German Final GDP

Price Action

  • Euro initially supported at $1.1600, the 38.2% retracement of this month’s gains.
  • Broke below $1.1600, with the next support at $1.1560 (50% retracement).
  • Resistance capped near $1.1620–1.1630.

Key Points:

  • Euro gains from strong PMI reversed as dollar strength dominated.
  • US yield advantage widened, increasing pressure on the euro.
  • Support remains at $1.1560 with resistance near $1.1620–1.1630.
  • Dollar data strength overshadowed eurozone improvements.
  • Market focus remains on yield spreads and dollar momentum.

Japan

Overview

The dollar extended its recovery against the yen, reaching JPY148.40 yesterday, the highest level in seven sessions. Support came from firmer US yields, though the move was partially tempered by higher weekly jobless claims that pulled rates back and briefly weighed on the greenback. Despite this, the dollar managed to close above JPY148 for the first time this month. Follow-through buying today pushed the pair close to JPY148.80.

If the dollar continues to retrace losses from earlier this month, it has already cleared the 38.2% retracement objective at JPY148. The next technical target is the 50% retracement near JPY149.10, which aligns closely with the 200-day moving average. Market direction remains closely tied to US rate developments.

On the domestic front, Japan’s July CPI showed a slight moderation in headline and core readings, easing to 3.1% from 3.3%. However, once fresh food and energy are excluded, CPI remained unchanged at 3.4%, the highest since January 2025 and steady since July 2024. This highlights persistent underlying inflation pressures. Despite this, the probability of a Bank of Japan rate hike next month is low at around 16%. Market pricing points to higher odds of a move in October, with swaps showing a 57% chance, up from 36% earlier this month but down from a peak of 68% in late July.

Economic Drivers

  • Dollar strength supported by firmer US yields.
  • US weekly jobless claims triggered a temporary pullback in yields and the greenback.
  • Japan’s July CPI eased to 3.1% from 3.3% for both headline and core (excluding fresh food).
  • Underlying CPI excluding fresh food and energy remained at 3.4%, its highest since January 2025.
  • Market sees low probability of a BOJ rate hike in September (~16%), with October expectations at 57%.

Data and Events

  1. 22 August 2025: National Core CPI

Price Action

  • Dollar climbed to JPY148.40, a seven-session high, and later to JPY148.80.
  • Closed above JPY148 for the first time this month.
  • Key resistance at JPY149.10 (50% retracement and near the 200-day moving average).

Key Points:

  • Dollar advanced to highest in a week, supported by US yields.
  • Japan’s inflation shows only modest easing, with underlying pressures still elevated.
  • BOJ unlikely to hike in September, but October remains possible.
  • Market focus remains on US yields as the main driver for USD/JPY.
  • Resistance stands near JPY149.10 with support at JPY148.

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