Jackson Hole Symposium: Scenarios for the Dollar vs. Major Currencies

Talking Points:

• Markets Brace for Impact as Central Bank Top Brass Gather in Jackson Hole
• Pound Most Prone to Big-Splash Volatility After Weeks of Aggressive Selling
• Follow the Kansas City Fed Symposium on the DailyFX Real Time News Feed

A lull in fundamental event risk in Asia and Europe has left currency markets rudderless, with investors looking ahead to the Kansas City Federal Reserve Economic Symposium getting underway today in Jackson Hole, Wyoming. The annual gathering is a star-studded affair this time around, with the keynote speech to be delivered by Fed Chair Janet Yellen and scheduled appearances from ECB President Mario Draghi, BOJ Governor Haruhiko Kuroda, BOE Deputy Governor Ben Broadbent and BOC Governor Steven Poloz.

A gathering of so many policy heavy-hitters in one place all but guarantees that someone will invariably say something market-moving at some point before the affair is through. Needless to say, traders will be all ears. While it is impossible to precisely predict just what will be said and how it might impact exchange rates, filtering the established trajectory of monetary policy in the world’s leading economies through recent price action offers a useful layout of the probable scenarios.

The top four central banks can be grouped into two camps: those inching toward reducing stimulus and those that might expand it. The Fed and the BOE are in the former camp, while the BOJ and the ECB are in the latter.

While the US Dollar trades near a six-month high, the British Pound is working on the seventh consecutive week of losses. This means that for the greenback, there is confluence between overall direction of policy (i.e. a movement away from the dovish extreme of the policy spectrum via “tapering” of QE asset purchases) and the latest price action. Not so for Sterling: continued selling stands in contrast to seemingly supportive news-flow by way of a relatively hawkish set of minutes from Augusts’ policy meeting.

Central bankers are a stolid bunch and typically try to avoid bombastic rhetoric that might spook the markets, particularly at a wonky get-together like the Jackson Hole Symposium. That means Ms Yellen and her counterparts will probably seek to stay relatively “on-message” vis-à-vis existing policy trends.

This hints that the risk of big-splash volatility is comparatively lower for the US unit, where prices have already moved in a significant way to reflect the cautiously hawkish implications of recent developments. Similarly status-quo remarks from the BOE contingent would clash with recent Pound moves, meaning the threat of a sharp rebound may be asymmetrically greater than that of another big push downward.

Turning to the dovish grouping, the BOJ Governor seems less likely than otherwise to deliver another aggressive decline in the Japanese Yen considering prices plunged to five-month lows just this week. If a big swing in the exchange rate is to materialize, it seems disproportionately probable that such a move would take the currency higher. The same goes for the Euro after the single currency sank to an 11-month low.

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Asia Session

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Critical Levels

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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