The FED and ECB chiefs have kept their promise not to touch on the monetary policy issues in Jackson Hole, but Janet Yellen has suddenly succeeded more in that. The Dollar lost ground on Friday after the release of Yellen´S speech which was generally useless for investors. The absence of any clues was a signal for the reduction of dollar positions and increased concerns about weak inflation in the US.
In general, the head of Federal Reserve used the Jackson Hole platform for self-vindication, speaking in defence of post-crisis reforms, QE, free trade. Globalization in the opinion of Yellen is the key to international economic stability, as it contributes to raising living standards and accelerating technological progress. On the flip side, this process contributes in widening the wealth gap through moving jobs to regions with cheap labour, off-shoring, which strikes the middle class and is possibly the fundamental reason for the current slowdown in inflation. It should be noted that in the conditions of fencing off from the world economy pursued by Trump, the tools of the Federal Reserve and the ECB can significantly lose flexibility and efficiency. This implicit criticism of the president’s protectionist plans clearly reveals the friction between Yellen and Trump and raises a big question on the extension of her term expiring in February 2018.
In turn, Mario Draghi expressed his fears that populist rhetoric and the desire for protectionism could negatively affect the productivity of labour, in particular, jeopardize the prospects for its growth. It can be assumed that globalization processes preserve for the world economy some medium-term expansion potential and its some uniformity, which allow the Central Bank to rely on this fact to build future monetary policy. Much more information weight in Draghi’s speech was a comment about justified appreciation of the Euro, meaning that the ECB will not take any efforts to contain its growth, including verbal interventions. Such a nod from the official goes against the protocol of the July meeting, which said that too strong a currency makes officials nervous, creating the risk of “overshooting”. ECB head publicly refused to repair the barriers for the European currency, causing a sharp rise in EUR/USD above the 19th figure. Among other “delicious” details was the promise of Draghi to carry out the most painless cuts in the money supply, but when this happens is yet unknown.
Now the chances of breaking through the psychologically important level of 1.20 are much greater, however, the bulls are not likely to gain a foothold higher before the release of the NFP on Friday. Strengthening the labour market and the peaceful tone of Yellen suggest that the Fed allows for a further reduction in unemployment, in order to see which next minimum initiates the acceleration of inflation.
Gold updated highs, as Hurricane Harvey forced investors to seek enhanced comfort in defensive assets. Despite the fact that the natural disaster struck directly at the heart of the US energy industry, Oil futures did not respond properly to supply interruptions. While Brent added 0.40% while trading at 52.19, the barrel of the WTI lost about 1%, trading below $48. Because of the hurricane, it was necessary to cut about 10% of the production capacity, which is likely to be reflected in a greater drop in inventories in the API and EIA reports.
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