Inflation takes second place in FED’s priority list: employment is the new star
The market began the session without great movements and with some indecision awaiting the comments of Jerome Powell in the Jackson Hole symposium that is held annually.
The symposium has traditionally been a relevant market event, since the presidents of the Reserve Federal have made, on occasions, decisive statements that have influenced the market.
On this occasion, the market was interested in knowing what the Federal Reserve's assessment of the economy's state and the degree of recovery is, what are the inflation expectations and how they are going to handle it. Also, if the central bank is willing to implement unconventional monetary policy measures such as controlling the interest rate curve.
And indeed, as is customary in appearances at this symposium, the Fed chairman made a significant announcement that is seen as a regime change in the Fed's monetary policy.
For the first time in history, the Federal Reserve's goal of full employment takes precedence over-controlling inflation. Jerome Powell said that by unanimous decisions of the Fed members, they would allow inflation target level of 2% to be exceeded "moderately" for some time.
The question now is how much "moderate" means to them and how long they are willing to maintain this position.
In any case, this means that interest rates will remain low or very low for an indefinite period regardless of inflation levels and that if it were necessary to reach the employment levels that they consider to be objective, they could adopt new measures of unconventional expansionary monetary policy.
The immediate result of this important statement has been the rebound of the stock markets from negative territory in which they were before the appearance, the fall of the Dollar against all currencies together with the rise of the GOLD by its correlation in this case with the North American currency and an increase in the price of treasuries with a fall in the Tnote10 yield of around five bps.
But after this immediate reaction, the market has reversed all these movements. Why? Although low-interest rates over a long time are favorable for the stock market, fixed income, and the Dollar to depreciate, the change in attitude towards inflation, allowing it to rise above targets, can raise fears among investors.
USA500 has turned around after reaching a new high creating a bearish divergence on the 1-hour chart that, if held, could point to corrections, at least to the 3440 area.
EUR/USD has reached the 1.1900 level in a rapid bullish hiccup that occurred as the first reaction to Powell's statement.
Still, the reversal movement after the market digested all the information. With it the Dollar strengthened, it has brought it back below 1.1800, thereby anticipating a head and shoulder pattern that would trigger below around the 1.1735-50 area and would have a theoretical target at the 1.1550 area.
After today, a new scenario opens up in which economic data on employment and inflation will be very relevant to anticipating future movements in the market.
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