Morning Bid: Dollar stuck in a Hole as Powell speaks

A look at the day ahead in U.S. and global markets from Mike Dolan

Jerome Powell takes centre stage at the Federal Reserve's Jackson Hole jamboree on Friday but the Fed chair would have to sound super hawkish to stop the dollar recording one of its worst weeks of the year.

Powell's colleagues have already done a fine job tamping down expectations that the Fed's first interest rate cut next month will be as much as 50 basis points - and futures markets are squarely priced for little more than a quarter-point move.

Boston Federal Reserve President Susan Collins on Thursday said the timing "seems appropriate" to begin easing but added that she favored a "gradual methodical approach to revisiting our policy stance over time".

The latest U.S. business surveys for August underlined that lack of urgency as they beat forecasts, due largely to robust responses from service sector firms. Home sales in July were also above expectations.

But it wasn't all sweetness and light, with manufacturing still stuck in contraction mode and weekly jobless claims ticking higher. What's more, the aggregate global economic surprise index compiled by Citi is now clocking its most negative reading since the depths of 2020's pandemic lockdowns.

And so the direction of travel for "restrictive" U.S. interest rates remains down, almost 100bp of Fed cuts this year remain in futures prices and the dollar will likely struggle to reverse this month's sharp retreat in that environment.

That's especially so against the yen, where Bank of Japan governor Kazuo Ueda told parliament the central bank will push ahead with further rate rises there as long as the incoming economic data pans out as now assumed. And on that score, the latest Japanese inflation numbers were bang in line, with annual core consumer price gains for July as expected at 2.7%.

Although he acknowledged policy caution following recent market turbulence, Ueda told parliament: "Japan's short-term rates are very low. If the economy is in good shape, they will move up to levels deemed neutral."

Dollar/yen slipped back below 146 after the testimony and the Nikkei stock benchmark closed 0.4% higher.

Two-year Treasury yields barely clung on to 4% ahead of Powell's keynote speech at 10am New York time, albeit up more than 10bps from the week's low.

And Wall Street stock futures clawed back much of Thursday's swoon ahead of Friday's bell, with the S&P500 still eyeing the record high it came within half a percent of hitting intraday yesterday. The VIX volatility gauge fell back to just above 17 - a fraction below its long-term median.

Perhaps as big as Powell's speech for stock market megacaps is the approach of Wednesday's quarterly earnings report from artificial intelligence bellwether Nvidia.

In politics, Vice President and Democratic candidate in November's White House race Kamala Harris delivered her key address to the Democratic convention in Chicago late on Thursday - saying she will aim to pass a middle-class tax cut as one of her plans.

Although the gap in betting markets has narrowed over the past week, PredictIt's site shows Harris remains favourite to win the election over challenger Donald Trump.

In overseas corporate news, Swiss food group Nestle lost 1.5% after announcing it would replace CEO Mark Schneider with company veteran Laurent Freixe.

Key developments that should provide more direction to U.S. markets later on Friday:

* US July new home sales; Mexico Q2 current account

* Federal Reserve Chair Jerome Powell speaks in Jackson Hole; Bank of England Governor Andrew Bailey and Norway's central bank governor Ida Wolden Bache also speak at the symposium

(By Mike Dolan, editing by Timothy Heritage; mike.dolan@thomsonreuters.com)