FX.co ★ Powell has a very difficult situation

The events in Afghanistan yesterday gave global stock indices an additional impulse to decline, which were already under pressure in anticipation of Powell's speech regarding the Fed's plans for the future at a symposium in Jackson Hole.

A series of terrorist attacks in the capital of long-suffering Afghanistan led to panic in the American establishment, and this also spread to the financial markets. But today, trading in the Asia-Pacific region was generally on a positive note, primarily due to Chinese stock indices. Following them, Europe also started trading in the positive zone. The overall optimistic mood is supported by futures on the main US stock indexes, which are traded in the green zone.

So, what can we expect from Powell's speech – a collapse in the markets with a simultaneous increase in the rate of the US dollar or not?

We are inclined to believe that even if he announces (the market believes that this will be the case) the decision to curtail the actual printing of money by repurchasing government bonds and mortgage-backed corporate securities, it is more likely open the possibility of returning to an ultra-soft exchange rate if these measures do not justify themselves and the economic recovery stalls.

Powell really has a very difficult situation. On the one hand, he is under pressure, primarily by his Fed colleagues Bullard and Kaplan, and on the other hand, the calls of Brainard and Daly to maintain a soft monetary course cannot be ignored either. There is also another aspect – the upcoming re-election of the Fed Chairman, which is actually worrying.

In general, we believe that there will be a noticeable increase in the market volatility amid the Fed Chairman's speech. Moreover, it will be supported by any scenario – both the decision to end above the monetary rate and a softer result that smooths out contradictions.

Forecast of the day:

The USD/CAD pair declined below the level of 1.2670 amid rising crude oil prices and expectations of Powell's speech in Jackson Hole. We believe that the increased demand for oil due to the growing tensions in Afghanistan and the likely outcome of Powell's speech will allow the pair to fall 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 symposium. We expect that growth above the level of 110.20 will lead to the pair's further rise to 110.80.