The Jackson Hole, WY Economic Policy Symposium has begun. The conference is a gathering of the world’s top central bankers and a hot bed of excitement for economists, market watchers and traders. As always, there are a lot of expectations riding on the outcome which, historically, has helped to shap the future of global monetary policy over the short to long-term.
This years conference is headlined by Janet Yellen, Chairperson of the FOMC, who missed the event last year. She is scheduled to deliver the keynote speech Friday morning. The speech is usually not used an opportunity to deliver policy announcements or intended direction but the wording will surely be analyzed for clues it may give.
The minutes from the last FOMC meeting indicated no change to the Fed’s outlook. If anything they backed down from rate hikes which is evident in the CME’s Fed Watch Tool. The tool shows a less than 50/50 chance for another interest rate hike before next summer, this is down from a month or two ago when outlook said the next hike could come as early as December. The market is now expecting the pace of hikes to not only slow, but peak at a much lower rate than previously thought. With current guidance there is a chance that rates will peak near 2.0%, maybe late next year, and remain there for the indefinite future.
Comments Janet Yellen makes on the state of the economy could result in immediate movement within currency and equity markets. A hawkish tone, indications that economics or inflation are heating up, will put a bid back into the dollar. A dovish tone, indications that economics or inflation are expected to remain cool, could cause the bottom to drop out. The dollar index has been in downtrend for some time and forming a very bearish looking continuation pattern as we approach Ms. Yellen’s big moment.
This week’s economic data does not support the idea of an overheating economy or one with inflation as a problem. If anything it shows an economy that is slowly moving forward and may have possibly hit a hiccup. On Monday the Chicago Fed’s National Activity Index fell to -0.1% and into the range indicative of an economy expanding within expectations. Later in the week housing data showed a sharp downturn in existing sales, the silver lining to that cloud being the fact sales fell due to low inventory and not because of demand. Today’s read on jobless claims at supports ongoing labor market health but not robust health.
Traders should keep their eye on the EUR/USD. Since the last round of central bank meetings and after last week’s surprise FOMC and ECB minutes, both resulting in diminished outlook, the pair has been trending sideways within a narrow trading and below a major line of long term resistance. Resistance is at 1.18000 and will become the next key pivot level, perhaps with tomorrow’s speech from Janet Yellen as catalyst. If she puts a bid back into the dollar resistance is likely to hold and a downward movement may begin. If she further undermines forward rate hike outlook, weakening the dollar, resistance will likely be broken and the EUR/USD will resume its 10 month uptrend.
In comments today Fed President Esther George said she favors rate hikes and a continuation of the rate hike path. In her view the economy is tracking toward the target rate and may overshoot if rates remain low too long. The next scheduled policy meeting for the FOMC is September 27th.
