Daily Market Pulse

Markets await Powell’s Jackson Hole speech


The USD and the major equity markets are both pointed lower this morning ahead of the much-anticipated speech at the Jackson Hole Symposium by Fed Chairman Jerome Powell. However, before Powell's speech are the weekly initial jobless claims releases which are supposed to improve from last week. In the week ending on August 22, 1.068 million people filed for unemployment which is an improvement from last week’s 1.1175 million. Analysts expect that Powell will introduce a new pandemic-era tool to combat the economic impact of Covid-19 and foster inflation in the United States. While the Fed has tried to keep inflation at 2%, a rate that policymakers consider manageable and indicative of a healthy economy, inflation in the U.S. has more often than not failed to reach the Fed's target since the financial crisis. Today’s speech is expected to see Powell announce that the Fed will now have an “average inflation” target. Investors say that the move will allow the Fed to be more comfortable with inflation creeping above the 2% threshold so long as it’s eventually offset by periods of below-average price growth. Most expect the USD to come under more pressure if Powell effectively sets the stage for a roll-out of this framework at the September meeting. With the pressure already on the USD, any surprise in the Powell speech could see a USD reversal. Dow Futures are looking at a lower opening later today and traders will have had some time to digest both the Powell speech and the result of the initial claims report. The third indicator which could move the markets today is Hurricane Laura which has hit southwestern Louisiana as a Category 4 hurricane with winds reaching 150 mph and wave surges of up to 20 feet deep. The USD Treasury markets were quiet overnight as the 10-year note fell to 0.6851%, while the 30-year bond fell to 1.4051%. The USD may remain under pressure today.


EUR/USD is consolidating and trader below overnight highs in quiet trading ahead of the Powell speech. Technically, moving averages are converging without specific direction and RSI is currently neutral at 49. The EUR has been unable to break through resistance levels in the last few trading sessions and continued failure could see a reversal of thought and a move lower. While coronavirus headlines have shown an increase in cases in Europe, traders continue to hope for a vaccine coming sooner rather than later. EU Trade Commissioner Phil Hogan stepped down from his post after violating quarantine rules in Ireland. The prominent figure was involved in EU-US talks and also in Brexit. His departure may delay trade deals as the European Commission scrambles to replace him. Without any surprises from the Powell speech, the Fed may lend support to the EUR.


GBP/USD is trading near overnight lows ahead of the Powell speech. Technically, look for sterling to move higher as the 50-day moving average has broken through the 100 and 200-day moving averages. The RSI is trading at 54. The departure of Phil Hogan could delay Brexit talks. He was a close ally to chief EU negotiator Michel Barnier and was considered to be important in influencing future commercial relations between Brussels and London through his post as Commissioner of Trade for the EU. Coronavirus headlines are mostly positive on both sides of the Atlantic, with cases declining in the US and seemingly under control in Britain. Efforts to develop a vaccine are in full force and fresh headlines regarding medical developments could boost sentiment and depress the safe-haven dollar.


USD/JPY is trading in the middle of its overnight range with pressure looking towards the downside. The 50-day moving average is about to break through the 100-day on the downside, which should increase the move lower. Earlier in the overnight trading session, the currency pair moved to overnight highs, but this move was explained away as some short-covering and the move higher quickly fizzled out. BoJ board member Hitoshi Suzuki was quoted overnight saying “with the economy having lost momentum to achieve our price target due to the pandemic, monetary easing will last even longer”. He noted that the benefits of the central bank’s ultra-easing monetary policy still outweigh the costs. He also said that “If a second and third wave of infection hits Japan, financial institutions’ credit costs could balloon to levels near those hit after collapse of Lehman Brothers” during the 2008/09 global financial crisis.”



USD/CAD continues to grind lower amid rising oil prices due to Hurricane Laura. Technically, the 50-day moving average has dropped below the 100 and 200-day moving averages and the is some selling momentum as RSI has fallen into the lower 40’s. Analysts are now looking for the USD/CAD to trade towards a lower range through the year-end. Oil prices were stable overnight as Hurricane Laura made landfall. Brent crude futures for October, which expire on Friday were $0.06 higher at $45.70 per barrel. November Brent trading was more active and those prices were relatively flat this morning at $46.17 per barrel. U.S. West Texas Intermediate crude futures eased off $0.08 to $43.31 per barrel. Bank of Canada Governor Tiff Macklem, will speak at Jackson Hole later today and is expected to reiterate that the central bank will maintain its key interest rate at the lower limit of 0.25 percent until inflation gets back into the Bank of Canada’s target range. As the hurricane plays havoc with the Gulf of Mexico, the loonie may remain strong.


Mexico’s economy could contract by almost 13% this year, the central bank warned on Wednesday after GDP data showed the pandemic lockdown had thrown the country into the deepest slump since the Great Depression. Offering some rays of hope after lowering its economic forecast for the year, the Banco de Mexico suggested in its quarterly report that a recovery could happen more quickly next year than previously thought. The central bank said there was a high degree of uncertainty in providing economic forecasts during the ongoing pandemic, and as such provided three possible economic scenarios. In the best case, the economy would shrink by 8.8% this year, and rebound by 5.6% next year, the bank said. In a gloomier scenario, growth would be a meager 1.3% next year. The government previously estimated recovery of the Mexican economy to pre-pandemic levels could be reached in one or two years so long as no new coronavirus outbreaks strike. Fiscally conservative President Andres Manuel Lopez Obrador has resisted pressure to borrow to support the economy while picking fights with some businesses. “Data for the second quarter confirms the Mexican economy had its worst quarterly decline of the last eight decades, after the crash in 1932 caused by the Great Depression,” said Alfredo Coutino, an economist at Moody’s Analytics. The pandemic, which has infected 568,621 people and killed 61,450 in Mexico, has hit the Mexican economy harder than those of its Latin American peers due in part to “the absence of stimulus measures to mitigate the effects on companies and families,” said Coutino.


US-China tensions are on the rise again as Beijing on Thursday slammed Washington’s “tyrannical logic” over the latest US sanctions targeting Chinese expansionism in the South China Sea. In recent years, China has aggressively pursued its territorial claims in the South China Sea, building small shoals and reefs into military bases with airstrips and port facilities. Both the US and Chinese militaries have recently ramped up their actions in the region, raising tensions between the two. The US on Wednesday announced sanctions on two dozen Chinese companies and associated unnamed officials for taking part in building artificial islands in disputed waters. On Thursday, the foreign ministry spokesman Zhao Lijian denied that the construction work had anything to do with Chinese militarization and said it was within the scope of territorial sovereignty. “The US’s words grossly interfere in China’s internal affairs; it is wholly tyrannical logic and power politics,” Zhao said. “China will take firm measures to uphold the legitimate rights and interests of Chinese companies and individuals.”


Brazil reported 47,161 new cases of the coronavirus and 1,086 deaths from the disease caused by the virus in the past 24 hours, the health ministry said on Wednesday. Brazil has registered 3,717,156 cases of the virus since the pandemic began, while the official death toll from COVID-19 has risen to 117,666, according to ministry data, in the world’s worst coronavirus outbreak outside the United States. President Jair Bolsonaro rejected his economy minister’s plan to finance a new social program without additional spending, fanning investor concerns about the country’s fiscal outlook, and the future of Paulo Guedes himself in the administration. Bolsonaro said Wednesday he will not send Congress a proposal for the so-called Renda Brasil program as presented by Guedes’ team. The market-friendly minister sought to redirect funds from other social initiatives to finance the president’s signature social program, which he intends to launch next year when emergency stimulus measures will have expired. “Yesterday, we discussed the potential proposal for Renda Brasil and I said it was suspended. We will discuss it again,” Bolsonaro said. “I can’t take from the poor to give to the poorest.” The real weakened as much as 2.2% in early afternoon trading on Wednesday, leading losses among the world’s major currencies. Stocks slid 2.7%, the most in emerging markets.


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