FX.co ★ Powell's speech at Jackson Hole could start a rally in the stock markets

The new week begins with positive dynamics in the Asia-Pacific region. The local stock indices are growing quite well. The futures for US stock indices and European ones are also in the positive zone. Meanwhile, the US dollar is under pressure and crude oil prices surged by 2%.

How can the change in the market mood be explained?

We believe that such dynamics in the markets are due to the desire to buy cheaper assets after the recent worst week for the financial markets. This Friday, the Federal Reserve Chairman, J. Powell, will make a speech. He is expected to announce a decision at the beginning of the process of reducing purchases of US Treasury government bonds and mortgage-backed corporate securities.

It can be recalled that it was these expectations that caused the correction in the stock markets last week, so now, it seems that the market will balance, assessing the prospective volumes of these reductions. It is likely that today's rising optimism in the markets is due to the fact that Powell may give an incentive to an increase in demand for risky assets with a simultaneous weakening of the US dollar if he really raises the topic of the regulator's departure from the super soft course, but at the same time, makes it clear that the volume of reductions will not be so significant and smooth.

Investors may view the Fed's actions as being very cautious. In addition, if Powell also informs about the timing of the start of this process, for example, by the end of the year, or makes it clear that, if suddenly necessary, the Central Bank can resume asset repurchase in the current volumes, this will cause a strong rally in the stock markets, rising prices for commodity and raw materials products and a weakening of the US dollar.

Given the different variations of the likely development of events, we believe that it is necessary to exercise considerable caution this week.

Forecast of the day:

The AUD/USD pair found support at 0.7110 and is recovering in morning trading. It is likely to locally rise to the level of 0.7200 on the wave of closing a number of short positions and recovering demand for risky assets and for commodities.

The USD/CAD pair is sharply falling due to the rise in Asian crude oil prices, which currently added more than 2%. The growing positive market mood and crude oil prices, as well as local weakness in the US dollar, support the Canadian currency. If such sentiments persist and the pair consolidates below the level of 1.2785, the pair may drop to 1.2675.