Breaking the day: Fed chief back on stage in Jackson Hole and breathless market…

The start of the school year is approaching, which means that global markets are once again focusing their attention on the American Jackson Hole, where the traditional gathering of central bankers takes place and where ‘ often make very important statements, announcing major changes in currency. policy options. It could be true today as well, when Jerome Powell, head of the US central bank, will make a speech at 4 pm our time.

This time, Powell is expected to informally announce the Fed’s victory over high inflation and acknowledge that it would be appropriate to begin a cycle of interest rate cuts, or gradually begin to eliminate the monetary constraint that the central bank now applies. It is generally expected that the speech will refer to a departure from the problem of inflation and a shift of attention to the second step of the Fed’s dual mandate, which is full employment and therefore the labor market. For the financial markets, it will be crucial how Powell explains and, above all, emphasizes that the unemployment rate rose this year from 3.7% in January to 4.3% in July. Although the current level of unemployment is not alarming, it will be important whether Powell comments on the speed at which it is increasing, or whether he feels unclean from his speech. When it comes to explaining the current rise in unemployment, it will be important whether Powell explains it by cooling growth, or whether he accepts other explanations as well. For example, so that the current trend in the unemployment rate could be related to very strong immigration, which causes masses of new skills to be pushed into the labor market, which he cannot absorb. Let’s add that if this hypothesis were valid, it has important implications for monetary policy, since it would not have to deal with this “structural” (and possibly temporary) increase in the unemployment rate.

Of course, from the point of view of the market situation, the most interesting thing is whether the head of the Fed will send more concrete signals towards the upcoming meetings, from which it can be determined how aggressive it may be the Fed. to be at the start of the rate cut cycle. More precisely, are the considerations that the Fed would start with “fifty” in September (ie cutting rates by 50bps) reasonable, or how fast is the management of the Fed thinking about removing the restriction (eg reducing the levels at each meeting). The concern here is that Powell will not want to be too specific, which could be interpreted as a slightly hawkish exit given the relatively bearish position of the dollar’s yield curve.

*** MARKETS ***

Crown
The Czech currency ignored the further decline in sentiment in the German manufacturing industry, introduced yesterday by the PMI index, and continued to slowly extend its gains, giving the EUR/CZK currency pair is closer to within the range of the 25.0 mark.
The appearance of the head of the Fed in Jackson Hole today and the reaction of risk funds to him could decide whether the euro will manage to get below the level of 25.0. If Powell sends a very strong dovish signal in the afternoon (which we do not expect), the EUR/CZK pair could look below 25.0.

Eurodollar
The Eurodollar had an interesting session yesterday, influenced by incoming data and comments from the Fed. At the same time, the PMI business sentiment indexes, which initially helped the euro-dollar to go higher thanks to better output in the euro area, were only to slow down during the afternoon, as the American version of the index did not. fare badly (this also applied to other American data, after all). In addition, the Eurodollar was saddened by the relatively hawkish statement from P. Harker of the Fed, who said that the pace of rate cuts should be slow.
The Fed’s rhetoric should also generate volatility today, as Fed chief J. Powell will address a monetary policy conference in Jackson Hole. It is expected to give a clear signal that a cycle of rate cuts will begin in September. The question then is whether Powell can beat the gloomy expectations built into the dollar’s yield curve. In our opinion, rather than not, which could lead to profit taking on the Eurodollar.