Daily Alert – Friday 28th August 2020: Powell gets flexible on inflation: boosts equities, smacks the USD

Mark NugentAug 2020, Daily Alert

Daily Alert – Friday 28th August 2020: Powell gets flexible on inflation: boosts equities, smacks the USD

Risk sentiment was positive on Monday and Tuesday, turning indecisive for the rest of the week.

Fed Chair Powell announced “flexible average inflation targeting (AIT)” at the Jackson Hole virtual bun fight. After some volatility, the markets interpreted this correctly as being less of a slavish focus on the 2% inflation target, meaning the Fed would be less likely to react in the face of rising inflation. So, not quite the abandonment of the inflation target to be replaced with a GDP target as many, including me, would like to see (after all isn’t that what we’re here for, GDP, crap measure although it certainly is?) Removing the short-term focus on inflation will allow the economy more leeway to “overheat” and GDP to grow faster, when those days return which they will in the US if they do anywhere.

Powell’s action saw the USD drop and buoyed the equity indices, as you would expect.

On the weekly charts, it’s looking like the S&P500 and the Nasdaq will see new all-time highs as the week closes later tonight. Non-US equity indices are not faring so well. Oil grinds up and GOLD moves up slightly from recent lows.

My S&P500 long from Monday night is still alive. There is a bit of me wanted it to fail as my last losing trade was in early May and some people (including me) find that hard to believe. But thanks in part to Powell, the trade is currently standing at around a gain of 3.5%. I will exit tonight before the close. Another winner. Oh dear, never mind. I’ll get you the video next week.

On currencies, the weekly charts show a falling JPY and rising commodity currencies. The consistency award goes to AUD and NZD, both of whom have risen every day this week. No choppiness. We like that. The JPY itself, although down on the week has been choppy, making trading more difficult. The CAD has played the upwards game as per the other two commodity currencies apart from today when it has dived, probably resulting in a bear candle for the week. It is not clear why the CAD is behaving like this. The only CAD-related news today was GDP and that was a “beat”.

The USD has been dropping all week apart from on Powell’s announcement on Thursday where it took traders a while to work out that being more flexible on the inflation target will help corporates (fewer and later interest rate hikes) and weaken the currency. They got it this morning and the USD has continued down.

My rationale for a strong EUR has yet to be understood by the market as the EUR moves down for the second week. They’ll get it eventually.

I will be back on Tuesday with a brief Trading Plan (as it is a Bank Holiday here in the UK).

Have a great weekend.

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