Overlooked Hints from Powell

09/10/2019 9:54 am EST

Focus: FOREX

Adam Button

Co-Owner and Managing Director, ForexLive.com

While Fed Chair Powell didn’t appear to tip his hand in Switzerland last week, his concern over inflation missing the 2% target is justification for further easing, writes Adam Button.

Federal Reserve Chair Jay Powell didn't grab any headlines in Zurich but his Friday speech had more hints that the easing mode will last. The British pound (GBP) was the best performer Monday and the month amid hopes of closing the gap between Boris Johnson and his Irish counterpart on the Backstop. 

Parliament will be suspended today after one more vote on holding elections is held (most likely will be voted down again). FX traders will shift attention to the ECB later this week on whether a new package of stimulus/easing is announced.

CFTC positioning showed a spike in favor of GBP longs, U.S. stock indices are less than 1% away from their record high and the VIX broke below key technical levels, testing 15.0.

The headlines around Powell's appearance in Switzerland centered on two comments: That the Fed isn't forecasting a recession and that the Fed will act as appropriate to sustain the expansion. Neither statement is news as both stray into the obvious.

What was important was a change of tone on inflation. Powell talked about how the Fed's strategy is to avoid inflation expectations slipping with inflation stuck into the 1.5% to 2.0% zone. That's a strong hint on plans to cut rates, and on how they will be justified. Further he spoke about the fading relationship between economic tightness and inflation — an indication that the Fed will keep rates low after they cut, even if the trade war uncertainty (or especially) remains unresolved.

On the weekend, China's August trade surplus narrowed on an unexpected drop in exports. The surplus narrowed to $34.8 billion, about $10 billion smaller than expected. That came after exports fell 1.0% compared to a 2.2% rise expected. Imports fell 5.6%. More than the narrowing of the surplus, the story here is overall slowing trade and that's a worrisome sign.

But markets are looking ahead, hoping that last week's dovish moves by China’s central bank will boost growth. Will markets sustain their optimism ahead of what could be another disappointing announcement from the ECB this Thursday?

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -49K vs -39K prior GBP -85K vs -89K prior JPY +28K vs +34K prior CHF -6K vs -4K prior CAD +5K vs +11K prior AUD -59K vs -61K prior NZD -31K vs -26K prior

Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.

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