AUD/USD finds itself at a technical juncture ahead of Jackson Hole

The Jackson Hole Symposium is an annual economic policy conference sponsored by the Federal Reserve Bank of Kansas City. It is held in Jackson Hole, Wyoming, and brings together central bankers, economists, and financial market participants to discuss important economic issues.

The first Jackson Hole Symposium has been held every year since 1978 except for 2020 (when it was cancelled due to the pandemic). It typically last three days in August, and this year is scheduled between August 24^th to 26^th.

The topics discussed at the Jackson Hole Symposium have varied over the years, but they have typically focused on monetary policy, financial stability, and global economic issues. The symposium has also been used to announce important policy changes, such as the decision to taper quantitative easing in 2013. And that means that Jerome Powell’s speech on Friday will be the main event.

A primer on Jackson Hole 2022

On August 26 2022, Jerome Powell delivered the vaguely-titled speech "Reassessing Constraints on the Economy and Policy”. Despite the 45 minutes scheduled, the speech lasted just 8 minutes and was arguably one of the most powerful central bank speeches since Drahi’s “whatever it takes” moment.

“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.” Jerome Powell’s speech at Jackson Hole 2022

The Fed was facing a lot of criticism for their slow response to rising inflation, but his comments convinced markets that they meant business with inflation. Prior to the speech the Fed had hiked four times; One 25bp hike, a 50bp hike and two 75s. The Fed then went on to hike a further seven times, which included two at 75bp, one at 50np and the remaining four at 25bp.

The key point of Powell's speech was that he signalled that the Fed was prepared to raise interest rates more aggressively than previously expected, and that they were willing to tolerate some pain in the short term in order to bring inflation down. This sent a clear message to markets that the Fed was serious about bringing inflation under control. Wall Street fell sharply lower and bonds experienced a sell-off to send yields and the US dollar higher.

What can we expect from Powell’s speech at Jackson Hole 2023

Jerome Powell speaks on Friday 25 August at 10:05 ET (14:05 GMT, 00:05 AEDT) in another vaguely titled speech call “Economic Outlook”. His speech can be watched on the Kansas City Fed YouTube channel, and it will have traders in tenterhooks in the lead up to it.

It remains debatable as to whether we’ll see similar levels of volatility this time around, given the rate of inflation has rolled over and the Fed have hiked rates by 300bp since Powell’s last speech (or 525bp this cycle). And that means we are not likely to be at such a pivotal moment like were one year ago.

Fed Fund futures are pricing in a pause at the FOMC’s September meeting, and for the FOMC to have already reached its peak interest rate. It seems highly unlikely that Chairman Jerome Powell will feel inclined to provide a dovish undertone to his speech at Jackson Hole, but any hint of dovishness could send the US dollar and bond yields notably lower.

If there is to be a surprise, it may be that Powell's speech is more hawkish than expected, given the resilience of the US economy. In that case, we may see the US dollar move higher and bond yields rise. However, even that seems questionable, given that real yields are near 10-year highs and the US 2-year Treasury yield is now above 5%, a level it has struggled to hold above this century.

Therefore, even if yields do rally after the speech, it is likely that they are closer to their highs than their lows or even the middle of the trend. This suggests that any breakout could be short-lived, and price action for the US dollar and other currencies could remain choppy in the summer months.

US dollar index (DXY) technical analysis – daily chart:

The US dollar index has risen over 4% since its double bottom low in July, and briefly tapped a 2-month high last week. Yet two indecision daily candles (doji’s) show a hesitancy for USD index to push immediately higher. Resistance has been met around the July high and the bearish trendline from the March high, and the 20-day DPO (detrended price oscillator) suggests the USD index may be near a potential cycle high. Therefore, we may find that price action remains choppy around these cycle highs leading into Powell’s Jackson Hole speech.

AUD/USD daily chart

AUD/USD fell nearly 8% from the July high to August low, which is its worst run since the March high. We’ve not really seen much in the way of a retracement higher, and given AUD/USD failed to hold below 64c and momentum is now turning higher, I suspect it is now trying to make its way back to the May high ahead of the Jackson Hole meeting. From here, bulls could seek dips down to 64c with a stop beneath the cycle low and use place a take profit just beneath the May low. Bulls could seek continuation patterns on intraday timeframes or evidence of cycle lows to position themselves for the anticipated countertrend move higher.

But given the potentially binary outcome of Jerome Powell’s words on Friday, it might be a bit of a coin flip for traders to hold any position around the evet unless their protective stop loss is wide enough to withstand unpleasant levels of volatility. And volatility is clearly expected, with the 1-week implied volatility bands covering most of the 63 – 65c range.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge