FX.co ★ Powell's speech will determine the market dynamics in the upcoming months

Today, the traditional economic symposium expected by the markets begins in Jackson Hole in the United States. Ahead of this event, a three-day rally was noted in the stock markets. Crude oil quotes also received significant support.

What was driving the markets and why can these positive sentiments persist and even strengthen?

It seems that although investors understand that the Fed will never stimulate the national economy with massive support measures, trying to return to the mainstream of normal monetary policy, the fragile state of the economy and its strong dependence on the influence of the COVID-19 topic can force the regulator to resume the quantitative easing (QE) program in one way or another. This means that the flow of liquidity will continue, fueling the inflation of financial bubbles in the local stock market.

Everyone is well aware of the high risks of such a policy, but America, in its desire to maintain its position wherever possible, and even to the full, has simply driven itself and its national economy into a corner. Obviously, there will be a reckoning, but not here and not now, so the financial market continues to celebrate, and few people care about what will happen later.

The importance of the speech of J. Powell, Fed Chairman, cannot be overestimated due to high expectations. Investors are not reacting to anything except for this topic and even the events around COVID-19 faded into the background. A striking example of this is the lack of reaction to the release of important economic statistics.

For example, the publication of data on basic durable goods orders yesterday. They increased in monthly terms by 0.7% against the revised value of 0.6% a month earlier. The forecast was 0.5%. On Monday, PMI values in both manufacturing (PMI) and services came out weaker than expected. The numbers turned out to be noticeably below expectations – 61.2 points against 63.4 points for the manufacturing sector, and 55.2 points for the service sector against 59.9 points a month earlier.

To sum up, we can say that Powell's speech tomorrow will be an important event, and not only this week, but perhaps, it will also determine the behavior of financial markets for at least the next six months.

Forecast of the day:

The USD/CAD pair is consolidating in a narrow range below 1.2635 amid correction in crude oil prices and expectations of Powell's speech at Jackson Hole. If this level holds, the pair is likely to decline to the level of 1.2525.

The USD/JPY pair is still in the range of 109.50-110.20 before Powell's speech at the Jackson Hole symposium. We believe that the breakdown of the 110.20 level will lead to the pair's growth to 110.80.