Volatility was extremely high on Friday as investors focused on Jerome Powell’s speech at the Jackson Hole conference. Stocks cratered, bonds fell sharply, metals plummeted, and the USD has been the clear winner so far, with the dollar index rising to fresh two-decade highs.
Fed stays on course
The turmoil in the markets follows Powell’s remarks that the Fed has no intentions to switch to a more dovish rate policy and would continue to raise borrowing costs, as said at a closely-watched central bank symposium in Jackson Hole, Wyoming, on Friday.
He also cautioned that higher rates might hinder US economic growth, stating that individuals and firms may experience “some pain” prior to the control of skyrocketing consumer prices.
According to Powell’s remarks, the Fed will most likely raise borrowing prices by 75 basis points in September; based on the FedWatch Tool from CME Group, this possibility has increased from 47% to roughly 75%. As a result, rates will end the year much over 3%, according to other forecasts.
Looking at the larger picture, the dollar looks to be supported by the Fed’s divergence from the majority of its G10 counterparts, particularly the ECB, as well as periodic resurgences of risk aversion and geopolitical issues.
You may also read: Weekly macro report – Jackson Hole is our confirmation
Hawkish ECB leaves no market reaction.
At the same time, policymakers from the European Central Bank maintained a hawkish stance. Still, the common currency failed to begin the new week on a positive note.
Francois Villeroy de Galhau, a member of the ECB Governing Council, stated that the central bank has to raise interest rates significantly again in September. According to ECB policymaker Olli Rehn, the euro’s exchange rate was a “major concern” when formulating monetary policy. Isabel Schnabel, a member of the ECB Governing Council, concluded that even if the eurozone had a recession, they would still be forced to proceed with normalization.
The daily chart is entirely pessimistic, with the pair on course to see its third straight heavy monthly decline and the eventual weekly closing below parity level for the first time in two decades.
Oversold weekly charts raise expectations for a recovery, which would be effective if the price is above 0.9900. A return above parity would strengthen the initial positive signals, but more upward movement will be required to eliminate the immediate downside risk and produce stronger bullish signals. The pair must close above 1.02 to cancel the immediate bearish pressure.
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