Over the past few days, market participants have shoved aside their worries about monetary policy to focus on political developments in the US, more specifically the resignation of several of its advisors. Rumours that Gary Cohn may follow the pack triggered a wave of panic among investors. Equities took a hit with the S&P 500 ending in negative territory for the second week in a row, down 2.08% overall. The tech-heavy Nasdaq closed below the neutral threshold for the fourth week in a row, down 2.7% since July 24th.
Nevertheless, the annual high mass of central bankers in Jackson Hole will likely draw investors’ attention away from Trump’s political troubles. As usual, the US and EU central banks will be the biggest player at the table. However, this year is quite different as both of them made clear they are willing to move further toward tightening. The Fed has been delaying the announcement of the starting date of its balance sheet run-off for several months, while the ECB has been reluctant to give further information regarding tapering. Moreover, both institutions are facing growing unease as inflation levels have decelerated in the USA and the euro zone. The market is therefore eager to get clarity on this specific topic. The central bank policy forum on Thursday will be the key event of the week with Janet Yellen as main guest.
The US dollar has been trading mostly sideways on Monday even though it rose 0.15% against the single currency, 0.25% against the Swissie and 0.14% against the Aussie. Only the Japanese yen was able to extend gains, rising 0.10%. We expect appetite for the USD to remain weak ahead of Yellen’s speech, especially against the backdrop strong divergence among Fed members and lacklustre inflation data.By Arnaud Masset