Powell Speech Cheat Sheet: Details about the potential heat up to send USD down

Powell's consequential speech is set to rock markets and the more details he provides to the new policy – most probably allowing inflation to run high – the better for stocks and the worse for the dollar, FXStreet’s analyst Yohay Elam reports. 

Key quotes

“Investors expect Powell to announce Average Inflation Targeting (AIT) – allowing prices to run faster in one year or more, to compensate for slow inflation in the past. That means keeping interest rates lower for longer and thus weighing on the dollar. This scenario, which has a high probability, means an initial choppy reaction and a more moderate dollar decline afterward. For stocks, it would be supportive, but equities will likely return to focusing on economic data, politics, and other topics.” 

“If Powell says that Fed would tolerate around 3% inflation per year the dollar would crash. Investors are expecting only 2.25% or 2.50%. However, assuring investors that the Fed's zero rates are a long-term proposition would boost stocks, giving them a considerable jolt to the upside. This scenario has a medium probability – there is a higher chance that Powell will wait for Fed's September meeting and refrain from numbers.”

“Taking the academic, scientific approach, could also mean only theoretical talk – raising various options to change policy without committing to anything. The chances are low as Powell previously seemed eager to conclude the policy review and move on. In this case, investors would be disappointed that there is no additional oomph. Without a long-term commitment to zero rates, yields could rise and the dollar would follow. Such a non-event would deal a blow to stocks. While equities have shown their ability to recover – Powell could trigger a much-needed downside correction.”