Market waiting on Yellen speech after strong USD week

• US data and FOMC comment continues dollar strength

• Yellen to focus on labour markets, expect emphasis placed on slack

• Eurozone divergence obvious following PMIs

• Asian session quiet after volatile week

The hawkish noises heard on Wednesday night from the Federal Reserve were backed up by another strong session of data yesterday. Existing home sales, manufacturing sentiment and jobless claims all backed up the belief that the turn into positivity seen in the US economy is here to stay and extend higher.

The most impressive number was probably yesterday’s manufacturing PMI. Sentiment climbed to an index reading of 58.0 from 55.8 the month before, the highest since April 2010. The orders and production sub-components also hit a four year high with the all-important employment metric the highest since March 2013. The momentum is very much with the US economy at the moment and we can expect to hear further calls for monetary actions only increasing in the months to come.

Similar preliminary figures from France, Germany and the wider Eurozone have shown an extension to the slowing of activity seen in the latest data. The overall Eurozone composite PMI – a combination of both manufacturing and services data – showed a pull lower to 52.8 from 53.8 in July. While the increased headwinds being felt by German industry from the Ukraine/Russia conflict are being weathered slightly better than had been expected, elsewhere France is in trouble. The German economy may simply rebound from its Q2 nadir, but we have to take a wider view. If policymakers had to describe the nature of the recovery in the Eurozone in one word, it would be “uneven”.

With a wider ex-Germany slip closer to contractionary territory, we will see increased political pressure on the European Central Bank to further loosen policy as soon as it can.

It is this policy divergence between the European Central Bank and the Bank of England and Federal Reserve that will keep the euro vulnerable into Q4 and beyond. Rates will move higher in the UK and US as much as two years before the Eurozone; a long progression of single currency weakness is on a lot of people’s minds at the moment.

For all the excitement of the week cast from UK inflation and the minutes from the Bank of England and Federal Reserve, the week rather fizzles out. Janet Yellen’s speech at the Jackson Hole Economic Symposium has the prospect of setting out the path for the USD for the remainder of the year. The speech is widely touted to show a central bank Governor who is still unhappy with the level of job creation in the United States. It will be a communication of occasional brightness and not dazzling light – much like the US economy itself.

How close she will actually get to monetary policy is very much in question. Previous Jackson Hole Symposium appearances have veered between excessively wonky speeches and announcements of further quantitative easing. In all likelihood given the title of Yellen’s speech – “Re-Evaluating Labor Market Dynamics” – we are more towards the former. Job market dynamics are Yellen’s bread and butter and with the US dollar and treasuries no longer in any need of opaque verbal intervention she can concentrate on the academic side of things.

We know that the labour market improvement that has seen six consecutive months of 200k+ additions to payrolls has continued into Q3. Estimates of weekly jobless claims are now starting to sit below the 300k mark for the first time since the beginning of the Global Financial Crisis and we can start to pencil in a sufficient tightening of slack in the overall labour market in order to expect a forthcoming uplift in wages. Despite this, we would expect that comments around the labour market will focus on what more the Fed can do and has done than chatting about a post-QE landscape.

There is a little hint of USD weakness this morning as investors profit take before Yellen takes the stage at 3pm BST but I can’t see a large slump for the greenback into the weekend.

Have a great day and a fantastic bank holiday weekend.