The only thing that matters this week for event risk that has potential for big directional moves is the Central Bank Symposium starting Thursday at Jackson Hole. Yellen speaks on Friday on Financial Stability. The market suspects that despite the current low inflation environment she may highlight the ease of financial conditions as an important consideration supporting the need for further rate rises. US 10yr yields at 2.2% are currently at the lower end of the range for the year and the USD index DXY at 93.5 is near multi year lows. Yellen shouldnt be scared of market positioning and pricing because its going in the opposite direction to what scares central bankers from pulling the trigger. Yellen can save the USD Friday and it could be a turning point going into year end.
Draghi’s speech still doesnt have a time confirmed. He has a different problem to Yellen. He has a market that is positioned extreme long Euro and is prone to “overshooting” as expressed in the last ECB minutes. He will be scared to give this market more fuel to pop Euro straight through 1.2000. Reports suggest because of this he will stick to a narrow script. So is a washout of extreme longs on the cards and the risk? Chart below shows a neckline of support Euro has been basing off. No doubt there are stops littered below. Depending on just how measured Draghi is and whether Yellen has the courage to stick to the Fed’s rate path plan will decide whether the USD or the Euro wins the Jackson Hole currency war. The market generally inflicts the most pain on positioning …so may be worth backing the buck and looking for entry levels to start building small long USD positions going into Thursday. At the moment that looks towards 1.1780/1.1800.
