The event on Friday, August 23 is the speech of US Federal Reserve Chairman Jerome Powell at the annual central bankers symposium in Jackson Hole.
For 41 years, the Federal Reserve branch of Kansas City has been the organizer and sponsor of the symposium, which gathers central bankers, financial market participants, scientists and politicians. Topics of the US and world economy are discussed, as well as the approach to monetary policy. This year's theme will be the challenges for monetary policy. There are many, because nowadays there is again talk of monetary easing around the world. There is also the question of whether this makes sense, since the economy and inflation stopped responding to monetary stimuli in the same way as before the financial crisis.
The Federal Reserve Chairman will speak today at 16. The interest rate market expects the Fed to cut interest rates three times at 25 basis points by the end of the first quarter of 2020. At the end of 2020, another interest rate cut is expected. The probability of interest rate cuts in September is already 98 percent. To sum up, the market is counting on a new cycle of interest rate cuts in the US, and the Fed treats this only as a correction in the monetary policy tightening cycle.
If Jerome Powell in his speech just gives up the term "correction", mentions the possibility of re-using unconventional monetary policy tools or states that a strong US dollar interferes with inflation, these may be factors leading to a weakening of the US dollar. On the other hand, maintaining the opinion on the correction in the cycle of rates increases may lead to USD strengthening, as the interest rate market could reduce the valuation of interest rate cuts planned for the nearest period.
On the fx options market, we can observe a relatively low expected EUR/USD exchange rate volatility. This means that investors from the options market do not see today's speech as an event significant for this currency pair. Bearish sentiment towards the euro remains on the options market. We observe more investors willing to insure themselves against the fall of the euro than before its rise. This is also reflected in the EUR/USD exchange rate, which on Friday noon sets new August lows, approaching the level of 1.1050.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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