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Powell & Lagarde: Speeches Driving the Markets

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The heads of the two largest central banks in the world are scheduled to give speeches on monetary policy this week. Later today and tomorrow, Fed Chair Jerome Powell will give an updated outlook of the economic situation. Since his comments on Thursday are expected to be mostly a repeat of his Wednesday remarks, if there is something market moving, it will likely be later today. ECB President Christine Lagarde will speak on Friday and is expected to update the market on her view of inflation going forward.

Here are some of the key things to keep in mind before the potential volatility that could ensue in dollar and Euro pairs over the coming days.

So, Hikes Are Over?

Powell will be speaking for the first time since last week’s underwhelming jobs figures. We should recall that the number of new non farm payrolls failed to meet expectations, despite the birth-death adjustment adding over 400K to the estimate. Analysts expect the figure to be once again adjusted to the downside next month.

The sluggishness in the labor market is likely to be seen as pushing the Fed to forego the last rate hike of the year. In his post-rate-decision presser, Powell didn’t mention much new about the labor markets, and could clarify the Fed’s position a bit. Though, it should be noted that earlier this week, FOMC member Neel Kashkari, who’s normally considered a dove, insisted that further tightening might be needed. Investors are likely to be looking to see if the initial assessment that loosening labor markets would mean the Fed is done with hiking. Or if Powell sticks to his comments that he made last week, which could suggest that more tightening is coming and give the dollar a boost.

Inflation Will Stay High

With the ECB essentially committing to keeping rates at the current level, the focus is now on when the next cut will happen. Given the slowing of the economy lately, and the large drop in German inflation reported last week, that might be sooner than expected. The ECB has tended to emphasize that rates will stay high for a long time to bring down inflation that is expected to remain high for at least another year.

Last week, Lagarde said that she expected inflation to get back to target “in 2025”. There wasn’t any specificity about whether it was the early or later part. And keeping rates at the current level all through next year might prove to be more of a challenge as the shared economy slips into a technical recession. Since it’s expected that inflation will have to return to target before the ECB starts cutting rates, investors will be keen to see if there is any more precision about when that might happen. The sooner the projections result in a rate cut, the more the Euro could weaken.

How the Market Could React

Data so far this week has hurt the Euro as more and more signs build that the shared economy is headed for a recession in the second half of the year. Therefore, the market is likely to be more sensitive to indicators that the ECB might be considering bringing up the timeline for a rate hike.

Meanwhile, US jobs numbers have been softer, but still show that the country could avoid falling into a recession. Slower growth in the final quarter of the year could make the Fed’s job easier, but the market might be more eager to find upside for the dollar. With expectations that the interest rate gap between the dollar and Euro might widen when central banks get around to moving again, might keep downward pressure on the EURUSD.

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