Fed chairman Jerome Powell speaks tomorrow at the annual Jackson Hole symposium, an event the central bank has historically used to signal where monetary policy will head in September and beyond.
Then there is this weekend’s gathering of Group of Seven leaders, which coincides with speculation that governments might take action to weaken their currencies.
US president Donald Trump wants the Fed to confront that threat with rate cuts.
Investors worried about trade wars, stock market volatility and a slowdown in global growth have been diving into havens this month, making the yen and the Swiss franc the top performers among Group of 10 currencies in August. The Bloomberg dollar index is near its 2019 high.
The key for the next round of foreign exchange positioning is whether traders think the Fed will be dovish enough to meet market expectations.
Fed funds futures are currently pricing close to a full percentage point of easing over the next 12 months.
The market is “desperate for guidance”, said Investec Asset Management’s Russell Silberston. He said he is “at a bit of a crossroads” and is taking little risk in currencies due to the uncertainties.
Mr Silberston recently cut defensive positions, including long bets on the yen versus the greenback, in part because bullish positioning in the Japanese currency has surged. He is looking to other markets for direction.
“If risk assets are correct, then bonds are super-expensive and the US dollar is going to make new cyclical highs,” he said.
“But at the moment, we are unsure which way to call this so, having had a reasonable run recently, we are sitting out of the market and awaiting some clarity from the data and policymakers alike.”
Although Mr Powell on July 31 suggested the central bank’s reduction that day was not the start of a prolonged campaign of cuts, Mohamed El-Erian, chief economic adviser at Allianz, believes the Fed chief may reset expectations at Jackson Hole and signal the possibility of something more drastic.
That may help address the dilemma dollar investors face: the US currency has been climbing since the last Fed decision, touching a 2019 high this week. Many expected it to weaken.