August 27, 2021 9:05:29

The waiting is nearly over as we get Fed Chair Powell’s keynote Jackson Hole speech later today, scheduled for 15.00BST. Much has been written and discussed as it is a conference that has history for major policy shifts. The change to a virtual meeting for a second year does underpin the uncertainty that the Fed faces in seeking to withdraw emergency policy support.

Yet, the most recent FOMC minutes showed that the majority agree enough progress has been made towards their symmetric 2% inflation target. The strong July jobs report surely also convinced a few more doubters. Perhaps officials want the comfort of another solid NFP next week to hammer out the details and pace of the taper. But for the hawks, “emergency” is perhaps the key word as they see these measures as no longer needed.

The dovish bar has been raised this week on the back of the increasing Delta variant delaying the economic recovery. But if Powell favours Autumn tapering, with details to come at the FOMC meeting in a few weeks, the dollar will find a bid. Remember that tapering comes before hiking rates, so any talk of the latter will be watched even more closely.

EUR/USD capped by trendline resistance

Recent gains in the world’s most traded currency pair have failed at the bearish trendline from its decline in early June. If Powell does confirm that the Delta variant is causing concern for policymakers, the euro should break higher towards 1.18 with resistance at the 50-day SMA at 1.1816. The late July/early August highs then stand in the way around 1.19.

This week’s low at 1.1691 acts as initial support ahead of key support at 1.1663/5. A more optimistic Powell outlook today will see dollar bulls aiming for new lows in the medium term towards 1.16. We note the ECB Minutes released yesterday highlighted again how far policymakers are from any policy tightening.

USD/JPY trading around 110

This pair is highly correlated to US 10-year Treasury bond yields which have moved higher in recent days. Much again depends on Powell with policy normalisation and conviction around Fed hikes coming in late 2022 potentially pushing prices to new highs. For now, we are trading around 110 with the 50-day SMA stalling a move north towards the August top at 110.80. Next line of resistance is the March high at 110.96, ahead of the year-to-date peak at 111.65.

If we do not get any new information from the Fed today and patience is the name of the game, prices may fall back towards a Fib level at 109.51 and this week’s low at 109.41. The August bottom sits at 108.72 as more significant support.

Volatility is expected irrespective of outcomes so it’s wise to take care on position sizes, especially as it’s Friday and the end of the week.