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Asian exchanges resumed their growth on Friday morning in anticipation of Fed Chairman Powell speaking at the annual Jackson Hole Symposium. Low volatility this week is mainly due to the fact that the markets do not have an understanding of how the Fed will implement a plan to support the US economy.

On Thursday evening, European and US indices went into the red zone after the head of the Federal Reserve Bank of Philadelphia Patrick Harker commented that the US economy does not need to reduce the key rate. "The probability of a decrease of 50 basis points is much less than 24 hours ago", he said. At the same time, nothing happened that would indicate such a strange increase in Harkerr's positive but the negative was clearly added.

The preliminary PMI data for August from Markit turned out to be noticeably worse than expected as the composite index fell to 50.9p., indicating that the economic expansion no longer looks convincing. Furthermore, the production index fell below 50p altogether. to a 119-month low.

Exchange Rates 23.08.2019 analysis

It turns out that the US economy still needs support? Of course, investors usually focus on ISM indices, which so far look stronger than the Markit indices. However, both trends are quite distinct.

Rumors that the President's administration is preparing a new package of tax incentives on Thursday found their confirmation. Economic adviser of Trump, Kudlow, said that an additional bill to reduce taxes for small businesses and the middle class will be proposed during the 2020 election campaign. New incentives will allow Trump to strengthen his position in the presidential race, but at the same time create additional pressure on the budget due to a decrease in fiscal flow. This means that government borrowing will increase, which requires a lower interest rate among other things.

Nevertheless, all these considerations allow investors to assume that the Fed will act in concert with the government without waiting for the recession to come suddenly, like snow in December. If so, then Powell can voice his position today in terms of preventive steps to support the economy "in the middle of the cycle", and these expectations create a balance of supply and demand, including in the foreign exchange market.

Stock indices are expected to close the week in the green zone. The demand for defensive assets will decline and gold quotes will return below 1,500 by the end of the day. Interest in risk will increase amid increasing the likelihood of an influx of new liquidity, which will allow oil and commodity currencies to rise slightly.

EURUSD pair

The euro continues to remain under pressure despite the fact that the PMI index in the eurozone in August unexpectedly rose instead of the expected decline. At the same time, this growth looks rather strange. It seems that production and the services sector live in different Universes. This effect is especially pronounced in Germany, where the production PMI fell to 43.6p, and in the services sector, it fell by 54.4p.

Exchange Rates 23.08.2019 analysis

Another thing is clear - the services sector will not be able to grow for a long time without production growth since a reduction in production means a reduction in the real incomes of workers, which means that the influx of money into the services sector will inevitably also decrease.

That is exactly how the ECB seems to regard the situation. The report on the July meeting on monetary policy gave a strong signal that the ECB is preparing a package of mitigation measures, and low inflation makes the introduction of this package inevitable. The euro outlook cannot improve under these conditions. The further decline is very likely and the unstable support of 1.1065 is about to fall. The chances for the movement towards 1.1026 is increasing and the euro will try to find temporary support at the lower border of the channel 1.0970/85.

GBP/USD pair

The lack of important macroeconomic publications and the lull in the political gave the pound a chance to recover slightly, which he immediately took advantage of. Today, the pound can continue to grow towards the support of 1.2195/2200. By the end of the day, an attempt is likely to update a maximum of 1.2270 if the world hears from Jackson Hole about the Fed's readiness to continue the cycle of cutting rates.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Performed by Kuvat Raharjo,
Analytical expert
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