Forex Markets Subdued Ahead of Powell’s Speech Due on Friday

 The U.S. dollar continued to rally, soaring from one-week lows on Thursday. U.S. Treasury yields climbed up above 1.34% today, supporting the currency. The forex market was mostly subdued during the last session, with traders waiting to see what signals the Federal Reserve might send at its annual Jackson Hole symposium.

 The conference will begin later in the day in virtual format. However, the main event is Fed Chair Jerome Powell’s speech, scheduled on Friday. Analysts widely expect Powell to signal when the central bank could start unwinding its monetary stimulus.

 Meanwhile, Bond markets experienced a heavy sell-off on Wednesday. This was caused partly by investors and traders hedging their bets ahead of the speech. As a result, 10-year Treasury yields skyrocketed to nearly two-week highs. 

On Thursday, the dollar index surged forward by 0.12% to 92.933 against six rival currencies after tumbling down to 92.801 for the first time since Aug. 17. The greenback exchanged hands at $1.1761 against the Euro, remaining near a one-week low of $1.1775 reached on Wednesday. 

Forex market swings have eased considerably ahead of the speech, with implied EUR/USD volatility at a one-week low. Currently, markets are trying to assess how the agency will react to signs that inflation could be less transitory than it had thought to be. Traders contemplate whether the Fed will stick to its new policy framework of letting inflation run hot. Thus far, Powell has held a dovish tone. However, there are clear signs of dissent within the agency. 

What do the analysts say?

Mizuho senior economist Colin Asher noted that the last time currency markets moved a long way was after the June FOMC meeting. It seemed like the new Fed was quite similar to the old one in that they would increase rates at the first sign of inflation. 

He also stated that strong global economic growth indicated a softer greenback, but the Fed stance would be key. Asher thinks that the new Fed is the new Fed. Still, if it proves to be the old one, it’s a less benign backdrop, and in that case, the U.S. dollar will remain reasonably well supported.

So far, signals of a taper that began this year had boosted the dollar index to 93.734, reaching a 9-1/2-month high last Friday.

How did the British Pound fare?

 The sterling steadied against the greenback on Thursday. It consolidated gains made on the back of a risk-led rebound this week, reclaiming the $1.37 level.

 The British Pound has exchanged hands largely in line with global risk sentiment in financial markets during the recent weeks. The currency tracked the direction of stock markets higher or lower. 

Even though concerns about the Delta Covid-19 variant have rattled stocks, commodity prices surged forward. That, in turn, has helped put a floor under risk-off, growth-correlated currencies, such as the sterling. 

On Thursday, the Pound declined by 0.1% to the U.S. currency at $1.3739, after soaring by 1% against the greenback this week. 

ING strategists stated that with no domestic factors driving the Pound’s movements, the GBP/USD pair had been largely following the risk recovery, rising higher thanks to the U.S. dollar’s weakness. Meanwhile, the EUR/GBP pair remains firmly stuck in its recent range. They also added that it’s unlikely for the situation to change today, considering the U.K. isn’t planning to release new economic data. 

They also noted that if the greenback stabilizes before Friday’s Jackson Hole symposium, the GBP/USD rate could struggle to move back above the $1.3800 200-day moving average. 

What events should traders pay attention to?

 The main event is the Fed’s conference. Investors will watch it carefully. Prominent central bankers will also attend the symposium to get further clues on potential tapering by the U.S. Federal Reserve. 

Furthermore, analysts will be paying attention to daily British Covid-19 data. The government scheduled its release at 1500 GMT. 

Britain recorded 35,847 new coronavirus cases on Wednesday, which is higher than 30,838 cases reported on Tuesday. There were also 149 deaths within 28 days of a positive test, down from 174 the previous day. If Covid-19 cases continue to rise, the governments may have to issue additional restrictions instead of lifting them.