Powell Up Next

Today’s commentary from Fed chairman Powell at the Jackson Hole Symposium is attracting a huge amount of attention. Given the market’s ongoing tussle to try and gauge the timing of any forthcoming Fed tapering, today has been touted as a key opportunity for the Fed chair to offer clarity. On the back of the recent bumper July labour reports, Fed tightening expectations had ratcheted higher with an increasing number of traders expecting to hear Powell lay the out the path for tightening over the coming months.

Delta Concerns

However, the picture has become a little muddier over the last fortnight in response to the surge in Delta variant numbers in the US, and globally, which threaten to derail the economic recovery. While an increasing number of Fed members had been voicing their support for tapering recently, this support has become a little more diluted over the last week and the question now is whether the ongoing uncertainty around the pandemic will be enough to see Powell refrain from giving any tapering signals.

Powell To Strike A Balance

We recently saw the RBNZ unexpectedly hold off on hiking rates as a reaction to the fresh outbreak of the virus and we have heard other central banks too warning over the growing downside risks from this latest wave. With this in mind, expectations ahead of today’s meeting have become diminished. It now appears more likely that Powell will look to strike a balanced, cautious tone acknowledging the improvements in the recovery and the positives, where there are, while also highlighting the ongoing risks and uncertainty which the central bank needs to manage.

Hesitation Among Traders

With the Dollar down from last week’s highs, there is clearly trepidation heading into this event. If Powell does refrain from offering a tapering signal, this is likely to cause short term disappointment in USD, sending the greenback lower. However, with the August labour reports due next week, any correction might prove to be short lived and a solid set of results next week would likely reignite tapering expectations just as strongly. On the other hand, if Powell comes through today and delivers a tapering signal, this would likely catch the market off guar and see USD sent firmly higher into next week with the prospect of strong August NFPs furthering the rally.

Technical Views

Dollar Index (DXY)

The recent move higher in DXY has seen plenty of bearish divergence on both MACD and RSI indicators. With price failing at the latest test of the 93.40 level, reversing beneath, the focus now is on the test of the bull channel low. If this holds, the focus will stay on further upside in the near term. However, a break below there will put the focus on 92.07 and 90.98 thereafter.