Jackson Hole – What Should Yellen and Draghi Say?

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Market Drivers August 24, 2017
UK GDP in line
USDJPY recovers 109.00
Nikkei -0.42% Dax 0.30%
Oil $48/bbl
Gold $1286/oz.

Europe and Asia:
NZD Trade Balance 88M vs. -288M
GBP UK GDP 0.3% vs. 0.3%

North America:
USD Weekly Jobless 8:30
USD Existing Homes 10:00

It’s been a relatively sedate night of trading in the FX market with most of the majors contained to narrow ranges as summer doldrums and a barren economic calendar contributed to slow moving markets, but the dollar managed to stabilize and USDJPY is once again above the 109.00 figure.

The recovery in the greenback is likely due to a more conciliatory tone out of Washington DC with Senate majority leader Mitch McConnell who only a few days ago was questioning whether President Trump would be able to finish his term, stating that he was looking forward to working with Mr. Trump on his agenda on once Congress returns for the fall session.

Whether the political calm will last remains to be seen, but for now, the markets will begin to focus on Jackson Hole and most specifically the communication from both Mr. Draghi and Ms. Yellen. Ironically enough each policy maker must convince the markets of the earnestness of their intentions. Ms. Yellen needs to reassure traders that the Fed will indeed pursue its tightening path and that a rate hike in December is a near certainty.

Mr. Draghi, on the other hand, must dampen any expectations of an immediate taper despite the fact that conditions in the Eurozone have improved materially and ultra – accommodative policy is no longer necessary. The ECB is keenly aware of a market overshoot vis a vis exchange rates and does not want to see EURUSD trade above the 1.2000 level into Q4 of this year for fear of making exports from the region uncompetitive.

Thus, Mr. Draghi’s task is in some ways more difficult and unless he unequivocally states that no taper is coming for the foreseeable future, the EURUSD could shrug off any knee jerk selloffs. Ms. Yellen, on the other hand, must be unequivocal in her hawkish stance in order for USDJPY to recapture and maintain the 110.00 level.

Boris Schlossberg
Managing Director

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