Over the weekend, we had several European Central Bank (ECB) policymakers speaking in interviews on the sidelines of the Kansas City Fed’s Jackson Hole Symposium, expressing their concerns over the depreciation of the euro while maintaining the case for further rate increases in the coming months.

ECB Governing Council member Francois Villeroy de Galhau noted that ECB needs another significant interest rate hike in September

On neutral rate and further rate hikes, he said "We could be there before the end of the year, after another significant step in September. Have no doubt that we at the ECB would if needed raise rates further beyond normalization: bringing inflation back to 2% is our responsibility; our will and our capacity to deliver on our mandate are unconditional.”

Olli Rehn voiced his concerns over the inflationary impact of the falling euro, saying, “Certainly we are monitoring the exchange rate. This indirect channel is important - we are monitoring it and are looking at it as one indicator. It’s already a significant consideration” in setting monetary policy.”

Commenting on the September rate hike outlook, Rehn said: “The reality is that we have excessively high inflation globally, also in Europe -- that’s why it’s action time. The next step will be a significant move in September, depending on the incoming data and the inflation outlook.”

“Monetary policy is now facing the dual dilemma of on the one hand maintaining inflation expectations anchored, and on the other hand avoiding that we would push the economy into a recession. We have a severe energy crisis in Europe. it's quite likely that the euro-zone economy is slowing down. It’s slowing down as we speak, Rehn said while speaking about the euro area economic outlook.

The central bank board member Isabel Schnabel said, "even if we enter a recession, we have little choice but to continue the normalization path."

"If there was a de-anchoring of inflation expectations, the effect on the economy would be even worse, Schnabel added.

She further said that rates need to stay high, cautioned against pausing on early signs of a potential turn in inflationary pressures, adding that central bank rate-setters should instead signal their "strong determination" to bring inflation back to target quickly.

Meanwhile, Martins Kazaks, another Governing Council member said that  he’s “not happy where the exchange rate has moved because the lower rate further fuels inflationary pressures and the benefit of cheaper exports is diminished by supply chain disruption.”

On the September rate hike decision, he said that “the increase needs to be strong and significant, and at the current moment, I would say 50 or 75 basis points.”

“At least 50 basis points would be appropriate,” he said, adding that “the pace at which monetary support is removed must be orderly.”

FX implications

At the press time, EUR/USD is licking its wounds around 1.1960, almost unchanged on the day. The mixed remarks from the ECB officials fail to have any impact on the shared currency, as the US dollar price action and the prevailing risk tone are likely dominating fx currencies in Asia this Monday.

Speaking at the Kansas City Fed’s annual conference in Jackson Hole Symposium, Wyoming over the weekend, Bank of Japan (BOJ) Governor Haruhiko Kuroda said that the central bank will likely continue with its accommodative policy in Japan.

Key quotes

“Somewhat miraculously, now we have 2.4% inflation. But almost wholly caused by the international commodity price hike, energy and food.”

“So we expect that by the end of this year, may be inflation rate may approach 2 or 3%, but next year, inflation rate again decelerate toward 1.5%.”

“So, we have no choice other than continued monetary easing until wages and prices rise in a stable and sustainable manner.”

Market reaction

At the time of writing, USD/JPY is digesting the weekend’s remarks by policymakers in early Monday, keeping its range around 137.60, up 0.08% on the day.

• AUD/USD bears keep their defensive mode intact below 0.6900.
• USD holds the upper hand amid a risk-off mood, hawkish Powell.
• The aussie eyes Retail Sales data in the critical US NFP week ahead.

AUD/USD is trading below 0.7000, starting a brand new week on the back foot, as US dollar bulls keep the upper hand following Fed Chair Jerome Powell’s hawkish rhetoric during his appearance at the Jackson Hole Symposium on Friday.

Powell, in his prepared remarks on day 2 of the annual Fed event, said that “restoring price stability will likely require maintaining a restrictive policy stance for 'some time, adding that the Decision on the September rate hike will depend on the totality of data since July meeting.”

The US dollar staged a sharp V-shaped recovery on his comments, despite the retracement in the Treasury yields across the curve. The negative shift in the market’s perception of risk sentiment helped the uptick in the safe-haven greenback, as major Wall Street indices tumbled roughly 3.50% after Powell poured cold water on the idea of a Fed pivot that could jeopardize its war against inflation.

Heading into a new week, risk-off flows seem to extend into the Asian trading this Monday, reflective of the submissive tone in the higher-yielding aussie. Bulls also remain at bay, awaiting the Australian Retail Sales data for July due for release at 0130 GMT. The country’s consumer spending is seen rising by 0.3% in the reporting period vs. 0.2% booked previously.

Australian retail sales volumes rose 1.4% in the June quarter of 2022, hitting a new record level, for the third consecutive quarter, the Australian Bureau of Statistics (ABS) showed about a month ago.

The pair will also take cues from the broader market sentiment and the speech from Fed official Lael Brainard in the US Nonfarm Payrolls week ahead. China’s Manufacturing and Services PMIs will be also closely eyed for fresh hints on the health of Australia’s biggest trading partner, China.

AUD/USD: Technical levels to consider