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Will Powell drive dollar declines at Jackson Hole symposium?

With Powell set to headline the first digital Jackson Hole meeting, could a new average inflation targeting policy bring about another dollar decline?

Jackson Hole goes digital

After decades of meetups between central bankers and finance ministers in a mountain ski resort in Wyoming, this year’s Jackson Hole meeting is by name only. However, coming in a year that has seen some of the most dramatic expansion in global monetary policy, there will be plenty of anticipation over what could be forthcoming. One of the themes of this crisis has been one of uncertainty, with the speed and path of the economic recovery providing difficulties for chief executive officers (CEOs) and central bankers alike when laying out their outlook for the coming six to 12 months.

With the incessant gains in global markets highlighting expectations that we will avoid a second wave, markets are also pricing in a similar pathway for central banks.

Nevertheless, while markets are optimistic that the worst is over, the record-breaking market recovery has been built on the back of central bank and government stimulus.

With that in mind, it will be important to see another bout of easing to help bolster market sentiment. With the US Federal Reserve (Fed) recently seeking to hold off on any further action in a bid to let the economy rebound and the government implement fresh financial stimulus, we are seeing cracks on both fronts. As such, the focus shifts back to the Fed, with markets looking for some sort of indication of what the Fed’s long-running review of its policy tools and options might bring.

Will Powell bring allow inflation to overshoot target?

Chief amongst those potential measures could be a shift from a firm inflation target, to a policy of allowing prices to overshoot that target level over time in a policy called average inflation targeting (AIT). Such flexibility would ensure that short-term upside in prices should not stifle the loose monetary policy that is expected by market participants.

As such, should we see such a shift in targeting, the implications in terms of the longevity of this easing phase could be significant. While many are looking towards the Fed to provide fresh forward guidance, a move to provide a framework which allows further easing despite above 2% inflation could be just as important.

Alternative measures remain key

Nevertheless, traders should also keep a close eye out for any other measures such as forward guidance or negative rates. It does seem likely that the Fed chair, Jerome Powell, could indicate that rock-bottom rates will be around for a while yet. However, the negative rates are somewhat more contentious, in a move that could replicate the likes of the European Central Bank (ECB). With the Bank of England (BoE) apparently considering sub-zero rates as a possibility, there is no doubt that central bankers are looking to find ways to bring that extra boost to sentiment and economic growth.

However, with many of these institutions seeking to stretch themselves further if the economy needs it, there is likely to be a significant focus on the continued role of governments in helping to stave off further economic declines.

Dollar rolling over after recent resurgence

The dollar index has been on the rise over the past week, with price rallying into the 76.4% Fibonacci resistance level at 93.49. However, with a clear bearish trend in play, there is a good chance we see the green back turn lower from here.

A drop below the 92.86 support level would provide a bearish continuation signal as we seek to see another shift lower within a well-established downtrend for the dollar. Only a break through the 93.91 level would bring about a more bullish outlook.

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