Today, J. Powell will present Fed's perspective of where the balance is between high uncertainty and signs of improvement after a decline. The recent US data look quite optimistic, there is a strong growth in activity in the housing market and the growth of orders for durable goods in July amounted to 11.2%, which is significantly higher than the forecasted 4.3%. Thus, this clearly indicates that the industry is recovering.
Moreover, positive growth is very noticeable in the dynamics of the stock market – S&P 500 set another record high at 3481 on Wednesday. There are three assumptions for this growth and these are what the market wants to hear in today's speech by Powell at Jackson Hole. The following are: continuation of recovery in global demand, the US Congress finding a way to a compromise and propose another fiscal stimulus program (although, the banks' credit conditions will worsen) and lastly, we have the very driver that guarantees the growth of stock indices.
If Powell directly or indirectly confirms these main conclusions, then the dollar will receive a certain advantage against euro and other defensive assets, since the stock market will have reasons to continue rising, which will attract investors and increase demand for the dollar, and the yield spread will also be in favor of the dollar.
Thus, J. Powell's speech today may become the reason to confirm the reversal of the markets in favor of the dollar.
In favor of the fact that Powell confirmed the expectations of the market, the following circumstances also apply. The Fed does not have the opportunity to start a policy of normalization until there will be clear signs of an economic recovery. Traditionally, the Fed evaluates 3 factors - the labor market, inflation and GDP in the process of monetary policy. However, these indicators are not enough to see the depth of the problem. For example, the dynamics of intermediate costs (the cost of goods and services that are used as energy and materials in the production process) is negative. In addition, Trump, with his tagline to make "America great again", failed to restart the real economy sector, since the ratio of intermediate costs to gross output is already worse than in 2009.
Accordingly, the Fed is the only one that can maintain the stability of the dollar as the main currency in the world, since there are no other instruments left, except monetary ones. This is the reason why the Fed's position, which is expected to be announced by Powell today and which will be implemented at the next FOMC meeting on September 17, is so important for markets – it determines the future of the entire currency structure.
EUR/USD
The statement by Olaf Scholz, Germany's Finance Minister, supported the positive growth in Europe on Wednesday. He stated that the German government is extending their income support scheme until 2021 ends. They plan to reduce working hours, for which an additional 10 billion euros will be allocated from next year's budget.
As a result, the euro rose, but with a weak movement. It cannot manage to break through the resistance level of 1.1850. Today, a slow drift to the support of 1.1760/70 is expected in the morning and decline from the range is very likely. The target is 1.1690/1710.
GBP/USD
According to the CBI report on Tuesday, the retail employment in August declined the fastest since February 2009, with an even stronger fall expected in September this year. Unlike Germany, the UK has reduced the state program of wage subsidies, which inevitably leads to a drop in demand, and to a slowdown in the economic recovery as a whole.
Perhaps, new data will be released today. Andrew Bailey, the head of the Bank of England, will make a speech immediately after Powell. Technically, a rise to the level of 1.3220 on Wednesday will be the last one before a prolonged decline. The resistance is at 1.3250. Selling with the goal of 1.3030 can be considered, if attempts were made to increase.
