Home > Explaining the USD’s Reaction at the Fed’s Jackson Hole Announcement

Explaining the USD’s Reaction at the Fed’s Jackson Hole Announcement

August 28, 2020 By Mircea Vasiu

The much-awaited Jackson Hole Symposium created volatility on the currency market. As expected, the Fed announced that it alters its price mandate by letting inflation run higher than the 2% target occasionally.

But Powell’s speech, while priced in by the market, was not that clear in regard to the Fed’s view about average inflation; what is the Fed’s definition of average? As such, the USD has shown rollercoaster movement, tripping stops on both sides.

Bearish or Bullish the USD?

Trading the currency market is about pricing in the available information. Also, expectations about what a central bank may or may not do, drive the price action too.

In this case, the Fed’s decision was known to market participants way in advance. For all this time, the USD and the Dollar index moved lower. Then the announcement came yesterday.

Right before the release, the USD bears pushed again. A new have of selling sent the EURUSD, for instance, to almost new highs. It stalled at 1.19, though.

And then the USD gained across the board. The EURUSD reversed sharply to 1.1760 area, before bouncing and closing the day above 1.18. In other words, on the much-awaited Jackson Hole day, the EURUSD pair, the main currency pair on the FX dashboard, closed almost unchanged.

That was the case for all USD pairs, and it is a sign of the market having priced in the Fed’s message. What happens next with the USD is key.

The Fed will likely monitor the developments closely. The news that inflation will be allowed to shoot over 2% from time to time is dovish for the USD, but hawkish for the stock market.

Somehow the Fed faced a curious situation yesterday – it was supposed to communicate to markets that higher inflation is a good thing for the economy. To some extent, it is, but the USD was already depressed before yesterday’s statement. For example, gold denominated in USD reached a new all-time high in 2020, reaching levels above $2,050. In other words, investors already anticipated higher inflation as gold represents a bet or a hedge against it.

The Fed has done the best it could. The USD is at the lows against its main rivals (AUD, GBP, EUR, CHF) while the U.S. stock market sits at record highs. Investors quickly resumed the USD lower trend after the previous day’s announcement.

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