Source: IG Charts
Jackson Hole Symposium: How Will USD React?
Perhaps the biggest event risk for the week ahead will be the annual Jackson Hole symposium where Fed Chairman Jerome Powell will be giving a speech reviewing monetary policy. Typically this event generates a significant amount of media coverage and the current financial and economic circumstances, in light of the coronavirus pandemic, have amplified the atmosphere of urgency.
The event this year will be held digitally and livestreamed on August 27 at 9:10 am EST according to Bloomberg News. With unprecedented stimulus and rates near zero, investors and policymakers alike will be keen to hear about the Fed’s overview and what the path going forward may be. The Fed has made it clear that they have many levers to pull and will not hesitate to do so in order to preserve financial stability.
Much in line with moral axiom of “always a price to pay for everything you do”, there is growing concern about the integrity of financial markets. Unlimited quantitative easing (QE) and depressed yields have caused investors to flock to riskier and relatively illiquid assets in order to meet their growth objectives. This past month, U.S. high-grade debt sales hit a record $1.34 trillion for the year.
Concern about the financial integrity of higher-rated and lower-rated corporate debt continues to be sticking point among policymakers. Easy access to liquidity has eased credit crunch fears and has supported firms which may otherwise be proverbially underwater. However, if the Fed hints at less-aggressive easing, assets that were born and raised in an accommodative environment may find themselves hurting in the real world.
Concerns about insolvency may lead to aggressive credit downgrades and liquidation. The problem with these bespoke instruments will be then aligning buyers and sellers who may have no interest in exchanging at their respective price levels. The subsequent volatility would likely spillover into broader financial markets and require the Fed again to intervene and stabilize a precarious market it indirectly helped to create.
US Dollar Selloff May Deepen on Improving Domestic Data
US Dollar selling pressure may gain momentum if a slew of consumer-related data beat market expectations and reinforce the narrative of economic stabilization. The Citi Group Economic Surprise Index shows data on a global level has been outperforming relative to economists’ expectations. It also buttresses the point that policymakers and analysts may have overestimated the severity of the recession.
Data Outperforming Expectations Despite Slowdown in Global Economic Activity
Some key data points to monitor include consumer confidence, new home sales, initial jobless claims, personal spending for July and more. If the statistics fall in line with the broader trend of outperformance, this may pressure demand for havens like the US Dollar and accelerate its decline. With this in mind, traders may be preparing themselves for another week of Greenback weakness.
— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitri on Twitter