Powell predicts “some pain” as the Fed fights inflation

August 29, 2022

US stocks tumbled on Friday, as Jerome Powell gave a clear message that rates will likely stay high for some time, throwing cold water on the idea of a Federal Reserve pivot that could jeopardize its war against inflation. Moreover, the Fed chief reiterated that another ”unusually large” hike could be appropriate next month, though he stopped short of committing to one, adding that the decision will depend on incoming data. Overall, traders should expect more volatility and tougher conditions for equities with the Fed going to remain aggressive at the expense of growth.

The benchmarks, both S&P500 and Dow Jones Industrial Average plunged on Friday, as S&P500 saw its worst day since mid-June. All eleven sectors stayed in negative territory, as Information Technology performed the worst among all groups, dropping with a 4.28% loss daily, and six out of eleven sectors declined by more than 3% for the day. The Dow Jones Industrial Average fell 3%, the Nasdaq 100 tumbled with a 4.1% loss, and the MSCI world index decreased 2.5% for the day.

Main Pairs Movement

The US dollar rallied on Friday, following Federal Reserve Chair Jerome Powell adopting a hawkish tone to battling inflation. The DXY index dropped to a level below 107.8 ahead of the US trading session, then regained bullish momentum after Fed chief Jerome Powell’s hawkish talk, surged from 107.6 to a daily high level of 108.8.

The GBP/USD dropped with a 0.74% loss daily on Friday, as Fed Chair Jerome Powell delivered a hawkish speech at the Jackson Hole Symposium. The cables witnessed fresh transactions during the UK trading session and touched a level above 1.188, then tumbled to a level below 1.174 following the Federal Reserve Chief Jerome Powell took the stand. Meanwhile, EUR/USD fell to a level below 0.997, with a strong greenback across the board and an unchanged pessimistic economic future in the Europe zone. The pair was a little changed for the day.

Gold tumbled on Friday, as Fed Chair keeps a hawkish tone, and said higher interest rates will persist for some time, which heavily weighted XAU/USD. XAU/USD confronted selling pressure during the UK session and further declined to a daily low of $1,735 after Jerome Powell’s hawkish speech.

Technical Analysis

EUR/USD (4-Hour Chart)

The EUR/USD pair surged on Friday, extending its rally that started in the European session and refreshed its daily high near the 1.007 mark amid the emergence of some US dollar selling. The pair is now trading at 1.0067, posting a 0.92% gain daily. EUR/USD stays in the positive territory amid renewed US dollar weakness, as the softer-than-expected US PCE inflation data exerted bearish pressure on the greenback and provided support to the EUR/USD pair. On top of that, US Federal Reserve President Jerome Powell is delivering his speech about the economic outlook at the Jackson Hole Economic Symposium, a hawkish stance will play a key role and help determine the next leg of a directional move for the EUR/USD pair. For the Euro, the concerns about an extreme energy crisis in Europe have escalated amid the embargo on Russian energy imports. The Nord Stream 1 pipeline will remain shut for the last three days of August.

For the technical aspect, the RSI indicator is 62 as of writing, suggesting that the upside is preserving strength as the RSI keeps heading north. As for the Bollinger Bands, the price climbed higher and moved out of the upper band, therefore a strong trend continuation can be expected. In conclusion, we think the market will be bullish as the pair is heading to test the 1.0082 resistance line.

Resistance:  1.0082, 1.0171, 1.0188

Support: 0.9991, 0.9960, 0.9924

GBP/USD (4-Hour Chart)

The GBP/USD pair edged lower on Thursday, failing to preserve its bullish momentum. They retreated to the 1.182 area after the highly-anticipated speech from Fed Chair Jerome Powell at the Jackson Hole Symposium. At the time of writing, the cable stays in negative territory with a 0.36% loss for the day. The hawkish remarks on the policy outlook from Fed Chair Jerome Powell have underpinned the safe-haven greenback, as he said that higher interest rates would persist for some time. Moreover, the market now seeing greater odds of a 75 basis point rate hike, which rose back to 60% after the speech. The University of Michigan Consumer Sentiment also came in at 58.2 in August, which is better than expected. For the British pound, the bleak outlook for the UK economy continues to act as a headwind for the currency and weigh on the GBP/USD pair.

For the technical aspect, the RSI indicator is 42 as of writing, suggesting the GBP/USD pair’s downside bias as the RSI started to drop sharply toward 40. As for the Bollinger Bands, the price witnessed fresh selling and crossed below the moving average, therefore the downside traction should persist. In conclusion, we think the market will be bearish as long as the 1.1849 resistance line holds. On the downside, a break below 1.1780 could open the door for additional losses.

Resistance: 1.1849, 1.1922, 1.1980

Support: 1.1780, 1.1763

XAU/USD (4-Hour Chart)

Gold plunged to the $1,730 level after having advanced above the $1,750 level during the American trading hours on Friday as Fed Chair Jerome Powell reiterated his hawkish stance and helped the US dollar to rise strongly again.

Federal Reserve Chair Jerome Powell signalled the U.S. central bank is likely to keep raising interest rates and leave them elevated for a while to stamp out inflation, and he pushed back against any idea that the Fed would soon reverse course. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks at the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.” The comments of Powell were taken as “hawkish”. After all the dust settled, gold price turned south and plunged below the $1,740 level snapping its winning streaks and erasing all its weekly gains.

For the technical aspect, the RSI indicator is 34 as of writing, below the midline, suggesting that the following bearish trend could be expected as RSI slumped from above 50. As for the Bollinger Bands, the price dropped sharply across the moving average from its formerly upward trend, which is a typical pattern of turning weak, suggesting a downside momentum. In conclusion, we think the market will be bearish as fundamental and technical aspects both favour downside traction. If the price closes below $1,730, it might head to test the next support region at the $1,714 level.

Resistance: 1765, 1783, 1803

Support: 1730, 1714, 1685

Economic Data