The paramount intrigue of the week is the results of the Jackson Hole conference run by the Federal Reserve (Fed) and the statement of its Chairman Jerome Powell that is going to take place on Friday. Financial markets are desperately waiting for the major Fed policymaker to announce further perspectives surrounding the monetary policy.
However, the Fed is in awkward situation as, on the one hand, it has clear signs of economic recovery with 6.6% GDP up in the second quarter of 2021, and above 6.4% in the first quarter of this year, together with the first estimate of Q2 GDP growth being 6.5%. The economic recovery is taking place at the same time as the improving labour market, which is considered to be a sign for the Fed to tighten its monetary policy. Moreover, high inflation is still a matter of concern, even though that the Fed has said that markets should not take it into account..
So there seems to be enough reasons for the Fed to announce tapering of its bond buying program of $120 billion a month. If there is such an announcement, the Dollar may sharply strengthen with plummeting demand for risky assets. Ahead of Mr. Powell’s speech, the U.S. Dollar index jumped to 10-month highs, above 93.58 points on Thursday. This effort was supported by hawkish comments made by James Bullard, a member of the Fed.
Nevertheless, there are reasons why the Fed may not be so quick to taper its buying, as the new Delta variant of the coronavirus is still rumpling many economies and this could slow down economic recovery. So, the Fed may decide to extend monetary stimulus measures in full scale for a while. As there are arguments for tapering to both begin and to be prolonged, Mr. Powell may opt to make a compromise by listing all these reasons but without emphasising his priorities. This may be well in line with the cautious stand that the Fed officials usually tend to demonstrate.
So, the nuances of the speech may play an important role as markets may interpret them either way in order to form the next movements of the Dollar. Technically, the upside trend for the Dollar supported by many recent hawkish statements by Fed officials since the beginning of the summer may be formed if the U.S. Dollar index beats the 93.75 points landmark. Alternatively, if the Fed continues to maintain the current status quo in monetary policy, the index may scale back to 92.47 points where the downside trend may be formed.
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