The Jackson Hole Seminar to set the tone for the Market

Powell will participate in Jackson Hole, known for its fly-fishing hobby, and we should know whether the Fed is prepared to restore some liquidity or at least stop increasing liquidity. As risk appetite may be difficult to rebound, the US dollar should continue to bid in Jackson Hole risk events, and pro-cyclical currencies may face difficult times.

The Jackson Hole Seminar will influence the market?

The combined forces of the Fed’s shift to downsizing and reassessing global growth prospects supported by the Delta Variant pushed the dollar higher. With the Kansas City Fed holding seminars in Jackson Hole on Thursday and Friday, this week will focus heavily on the former. Most people expect the Fed to clarify its cut decision, which can be announced in September at the earliest and start in October. The length of the downsizing cycle will also be in the spotlight, with some FOMC members suggesting that the Federal Reserve contracts the cycle faster than it has seen recently in 2014.

Minutes from the July FOMC meeting were not particularly clear. There was much discussion about whether the threat of rising inflation should trigger an earlier reduction, or whether the Delta variant of Covid19 could “suppress the recovery” and justify the postponement of the reduction. “Several participants,” said that “the next few months” will have reasons to reduce quantitative easing, but “some,” others said that “early next year” may be more appropriate. Composition wise, “the majority … saw” the benefits of scaling down both institutional MBS and US Treasuries, but “a few” saw the benefits of focusing on MBS first. Recent comments from officials (after strong employment data in July) more openly support the idea of ​​an early and fast cut plan. Several Fed members have publicly stated that starting in October and ending in the second quarter, monthly purchases of US $ 80 billion in Treasuries and US $ 40 billion in institutional MBS will be cut proportionally, thus ending the purchase at the same point. on time.

However, this will all hinge on the RBNZ decision to postpone rate hikes until the Fed’s plan is clearer. With the number of cases in some hotspots like Missouri, Arkansas and Texas peaking, the Covid19 recovery has temporarily shown signs of slowing down, but Florida remains a major problem. We still expect any slowdown inactivity resulting from this to be temporary, and the encouraging comments from the Jackson Hole meeting will reinforce expectations that policy normalization will take place sometime later this year.

As the markets wait for the Jackson Hole seminar which is expected to spike volatility in the markets, all eyes will be on the Fed Powell to hint on QE tapering and that could set a new tone on the market. Despite all that is said above, the markets may not react as much as expected because the tapering headlines have been all talks for the past few months. At this point, it may be more important for risk assets that the Fed begins to clarify its interest rate hike program. If Powell uses Jackson Hole to provide such guidance, and if it is different from market expectations, then the Fed’s move will be riskier. Assets are likely to be produced.

Technical outlook

The Dollar index has been enjoying its upside movement since the 2008 financial crisis, even after the Index dropped more than 14% in 2017/18 and 2020. The bulls have been holding on to the 2008 support level. Recently we have seen the Dollar gaining against major peers and the market expect the move to the upside to continue in the coming months.

The price is currently trading below the $94.47 resistance level ahead of the Jackson Hole seminar, with the market already expecting some potential guidance on tapering the Dollar index will be eyeing a break above the level to continue its rally to the upside. A sustained move above the resistance level could see the price attempting to test the upper resistance of $103.71.

LULAMA MSUNGWA

Research & Markets Analyst

Scope Markets