FX Traders Vulnerable to Powell Surprise at Tuesday Town Hall

(Bloomberg) -- Option markets signal investors aren’t expecting any currency fireworks before the Jackson Hole symposium next week, leaving them vulnerable to surprises when Federal Reserve Chair Jerome Powell hosts a town hall meeting later Tuesday.

A gauge of average one-week implied volatility in the euro, yen, pound and Canadian dollar against the greenback is sitting just off its lowest since Feb. 2020. That suggests a degree of complacency, with traders betting Powell won’t say anything substantive till next week’s event. The Fed Chairman will respond to questions from educators in Tuesday’s virtual forum.

The market may be underestimating the town hall “given it’s for educators and we’ll have Jackson Hole next week,” said Kengo Suzuki, chief FX strategist at Mizuho Securities Co. in Tokyo. “There’s a good chance that Powell will take the opportunity to prime the market for what will come in Jackson Hole.”

Investors are eagerly anticipating the annual central bank gathering, looking for updates on Fed policy and whether the impressive July employment report will bring forward the likelihood of bond tapering. The symposium -- which takes place Aug. 26-28 -- has been the setting for important announcements in the past.

There is no guarantee Powell will make any comments related to monetary policy at the town hall, but there may be room for him to claim further progress is needed in the labor market before a taper. Even after the unemployment rate fell to 5.4% in July, it remains well above the pre-virus level of 3.5% from February last year.

If he does surprise, the currency most likely to move is the yen -- the best Group-of-10 performer this quarter -- where traders have built up sizeable short positions. Momentum indicators for the dollar-yen remain bearish and any dovish comments from Powell would likely pressure U.S. yields, leaving the pair vulnerable to breach near-term technical support.

Citigroup’s FX Pain Index for the Japanese currency, an indicator of active positions, is at its most negative since March 2020.

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