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Marketmind: Fed Chair Powell hoping to do a Maradona

·2-min read
Jackson Hole Economic Symposium

A look at the day ahead in European and global markets from Alun John

Did Fed Chair Jerome Powell watch Diego Maradona's second goal against England in the 1986 Football World Cup quarter final? And can his speech later on Friday match the Argentinian superstar's trick?

Mervyn King, the former bank of England governor - and maybe more familiar to Powell than Maradona - famously linked that goal and monetary policy in a speech to illustrate how people react to what they think you are going to do rather than what you actually do.

King noted how Maradona ran in almost a straight line from within his own half to score as several English players anticipated - wrongly - where he was about to turn and lunged out of his way.

The logic is if the Fed sounds aggressive enough about its plans to hike interest rates to bring inflation under control, that will cause a market reaction in itself.

"There's an element of the Fed wanting to be seen to be talking tough, hoping 'the tougher we talk the less we have to tighten policy,'" said Ray Attrill head of FX strategy at National Australia Bank. "It's the Maradona theory of monetary policy."

In the last couple of weeks markets have finally started listening to a string of Fed speakers saying they planned to keep on tightening monetary policy and not pivot towards worrying more about a recession, causing the dollar to regain some ground its lost and a equity rally to slow.

But there is still some exuberance left. U.S shares roses overnight, seemingly, as ING analysts, said "betting on Powell providing a lifeline, which seems like an optimistic point of view."

If Powell sounds hawkish, as ING expects, "the most likely market reaction would be a rise in yields at both the front and back of the yield curve, a sell-off in equities and dollar strength as markets seem to have been positioning themselves for a more supportive set of comments"

Much of the macro news in Europe on Friday will be dwarfed by Powell's remarks, though in Britain there could be some reaction to the energy regulator's announcement of how eye-watering the jump in a cap on energy prices will be, likely further boosting inflation in an already struggling British economy.

Fuel price increases are passed on to British consumers through a price cap, calculated every three months.

In Asian trade, shares gained about 0.5% following the U.S. gains, currencies were calm.

Key developments that could influence markets on Friday:

German GfK consumer confidence

UK power regulator publishes next energy price cap level

Sweden unemployment rate

Italian, Norwegian consumer confidence

U.S. personal consumption, Core PCE price index for July

U.S. Michigan sentiment index final for August

(Reporting by Alun John; Editing by Kim Coghill)