Market Analysis

Looking Ahead To Jackson Hole

The Fed-hosted Jackson Hole Economic Symposium takes place next week (24-26 August) with European Central Bank chief Mario Draghi in attendance. Markets are hoping that Draghi will provide a steer on how the ECB’s next policy meeting on September 7 will play out. Some might wonder if the rise in the value of the euro, which by definition reduces imported inflation, might lead ECB policymakers to conclude that any withdrawal of ultra-accommodatory monetary policy might not yet be needed. Certainly euro appreciation, by weighing on euro zone inflation, could delay a return to the ECB’s target of close to but below 2 per cent inflation. It’s also likely that ECB staff members will tweak their 2018 inflation forecast lower to take into account the impact of the euro’s rise.

But that might not preclude the ECB moving ahead, even if their actions fuel further euro strength. In the first instance, the ECB might well see demand for euros as reflecting returned confidence in the euro zone economy. Such demand might be welcome. Secondly, while the currency market understandably fixates on the euro’s value, the ECB doesn’t have an explicit exchange rate policy target. The euro intrudes on the ECB’s policy stance when the ECB perceives it to be affecting price stability in the medium, but not short, term. Traders will be hanging on every word Draghi says in Jackson Hole and if the ECB chief doesn’t overtly focus on the euro’s appreciation in recent months, the currency market may conclude that omission is telling.
Written by Neal Kimberley, External Currency Analyst.