Markets seek answers in Powell’s Jackson Hole address
Powell will address the conference at 09:10 EDT (23:10 AEST) next Thursday, speaking about the Fed’s policy framework review. It will be Powell’s first public appearance since the July FOMC meeting, when the Fed reiterated the monetary toolbox is ready to support the US economy.
Markets are seeking clarity around the Fed’s new policy framework, which has been in the works since late 2018 to adapt to a low-rate, low-inflation world. Depending on the contents of Thursday’s speech, Powell’s words could prove to be a volatility event, just as the July FOMC minutes did.
Traders have been waiting for details on an average-based inflation target, which would mark the biggest change to Fed policy in years. Rather than hiking rates when inflation reached the 2% target, an average-based policy would require inflation running above 2% for a sustained period of time. It would mean running the US economy hotter for longer: a long-run USD-negative and gold positive.
But the July FOMC minutes poured cold water on the prospect, noting only “a number” of members had discussed releasing forward guidance on the outcome-based approach to inflation. The prospect of yield curve control (YCC) was also taken off the table.
Markets had gone into the release positioned to hear more about looser policy, but when that didn’t happen it became a volatility event. The USD lifted, gold and silver fell 3%, and real Treasury yields closed the day 5bp higher.
Powell will have since assessed the market reaction to the minutes, and will provide any clarity he sees necessary. We know the Fed is ready to act if US economics takes a turn for the worse, but what markets really want is details of this new policy framework and if it’s something that will be implemented sooner or later.
The July minutes implied we can expect new forward guidance in the near future - so is the stage at next week’s Jackson Hole symposium an opportunity for a glimpse? Or will markets need to wait until the September FOMC meeting or even beyond?
As the speech could prove to be a live event, it might be worth considering your risk exposure over something that could be market-moving.
The Jackson Hole symposium is an annual economic conference hosted by the Kansas City Fed. The event brings together central bankers, academics, and financial market participants to discuss global economic issues. The title of this year’s symposium is “Navigating the decade ahead: Implications for monetary policy.”
The US dollar on Wednesday posted its biggest daily gain since March when the FOMC minutes cast doubt over an easier policy horizon. This saw a steep fall in on the EURUSD daily chart - and I draw attention to EURUSD here because the euro has the largest weighting in the US dollar index (USDX), a basket of currencies measuring a relative value of the USD.
Daily chart: EURUSD. Support at 1.18000. Green line: 5-day EMA. Blue line: 20-day EMA. Lower pane: MACD indicator. Chart source data: Metaquotes MT5.
The USD-gains extended into the session on Thursday before EURUSD bounced back, defending the 1.1800 handle and closing back above the 5-day EMA (green). The USD pared its gains on worse than expected unemployment data (jobless claims) and the Philadelphia Fed Manufacturing Index falling to 17.2 against consensus expectations of 21.
If Powell offers a sneak peak of easier policy at Jackson Hole next week, it could pave the way for a EURUSD move above the recent highs around 1.19500. More confusion or pushing policy announcements further into the future, and we could see a lower EURUSD or at the very least some choppy sideways movement.
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