- Fed Chairman Jerome Powell is due to speak on monetary policy at the Jackson Hole Symposium.
- All eyes remain on Powell’s speech for fresh cues on the US interest-rate outlook.
- The US Dollar is set rock on Powell’s speech after Wednesday’s dovish Fed Minutes.
US Federal Reserve (Fed) Chairman Jerome Powell is scheduled to deliver a speech titled “Reassessing the Effectiveness and Transmission of Monetary Policy” on the second day of the annual Jackson Hole Economic Symposium on Friday at 14:00 GMT.
Market participants will closely scrutinize Powell’s speech for any fresh hints on the trajectory of monetary policy, particularly about the magnitude of the Fed’s first interest-rate cut in years and the potential scope and timing of subsequent rate reductions.
His words are expected to stir markets, injecting intense volatility around the US Dollar (USD), as the world’s most powerful central bank heads toward a policy pivot as early as September.
In the July policy meeting, the Fed left the federal funds rate unchanged in the range of 5.25%-5.50% and shifted focus to the second component of its dual mandate – full employment.
Fed Chair Powell said during the post-policy meeting press conference that the labor market “has come into better balance”. “We are attentive to risks on both sides of the dual mandate,” Powell said, a shift from maintaining earlier that they are “highly attentive” to inflation risks.
“The unemployment rate remains low. Data suggests the labor market has returned to where it was on the eve of the pandemic. A broad set of labor market indicators show it is strong but not overheated,” Powell added.
Since then, other Fed policymakers have voiced their concerns about the strength of the labor market.
The US employment data for July, however, came in weak and spurred recessionary fears. The headline Nonfarm payrolls increased by 114,000 jobs last month after rising by a downwardly revised 179,000 in June, according to the US Bureau of Labor Statistics (BLS). The Unemployment Rate climbed to 4.3% from 4.1% in June.
Markets began pricing in a roughly 75% chance of 50 basis points (bps) interest-rate cut by the Fed in September while predicting 115 bps of cuts this year, which only has three scheduled Fed meetings left.
Following the US Consumer Price Index (CPI) data release, the odds of a big Fed rate cut diminished. Though the annual inflation rate in the US slowed for a fourth consecutive month to 2.9% in July, the lowest since March 2021, compared to 3.0% in June, the monthly CPI rebounded 0.2% last month after falling 0.1% in June, the BLS reported on August 14.
Recession fears were quelled last week after a strong Retail Sales report and encouraging Unemployment Claims data pointed to economic resilience. Despite encouraging US economic prospects, the outrightly dovish Minutes of the Fed’s July meeting and the Nonfarm Payrolls Benchmark Revision are leading markets to still price in a 35% probability of a 50 bps cut for September while the odds for a 25 bps rate reduction stand at 65%.
Most policymakers thought that “if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting,” the Minutes said. Further, the Minutes read that several of them would have even been willing to reduce borrowing costs already in the July meeting itself.
Meanwhile, the US Labor Department said that Nonfarm Payrolls (NFP) for the period from April 2023 to March 2024 was lowered by 818,000. The revision represented a total downward change of about 0.5%, prompting Fed policymakers to factor in the indication that the job market was softer than previously thought as they considered the pace of rate reductions.
Against this backdrop, the US Dollar (USD) braces for a two-way risk in the run-up to the highly anticipated Jackson Hole showdown.
How could Powell speech at Jackson Hole affect the US Dollar?
Even though Fed Chair Jerome Powell confirmed a September rate cut at the press conference, he is unlikely to pre-commit to any particular rate-cut trajectory. However, if he pushes back against the expectations for an aggressive easing, sticking to the bank’s data-depending approach, the US Dollar could see fresh signs of life against its major counterparts.
In the case of Powell explicitly noting that the Fed has gained sufficient confidence in inflation progress while admitting loosening labor market conditions, markets are likely to ramp up bets for a big and aggressive rate cut cycle in the upcoming months. This could offer extra legs to the ongoing US Dollar downfall.
Markets are wagering as much as a full percentage point worth of rate cuts by the end of this year, per Reuters.
Dhwani Mehta, Analyst at FXStreet, offers a brief technical outlook for the US Dollar Index (DXY):
“The DXY is heavily oversold on the daily time frame, and hence, a decent recovery cannot be ruled out in the coming days. The 14-day Relative Strength Index (RSI) is trending below the 30 level, currently near 25, suggesting that upside risks remain intact for the US Dollar Index.”
“If the downtrend sustains, the next cushion is seen at the 100.50 psychological barrier, below which the 100.00 threshold will be tested. Further, the July 18, 2023, low of 99.57 will be on sellers’ radars. On the flip side, buyers need to find acceptance above the static resistance at 102.00 for an extended recovery toward the August 8 high of 103.54,” Dhwani adds.
US Dollar PRICE This month
The table below shows the percentage change of US Dollar (USD) against listed major currencies this month. US Dollar was the strongest against the Canadian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -2.81% | -2.00% | -2.91% | -1.67% | -2.99% | -3.38% | -3.08% | |
| EUR | 2.81% | 0.84% | -0.11% | 1.17% | -0.18% | -0.57% | -0.27% | |
| GBP | 2.00% | -0.84% | -0.94% | 0.34% | -1.00% | -1.40% | -1.10% | |
| JPY | 2.91% | 0.11% | 0.94% | 1.28% | -0.09% | -0.53% | -0.20% | |
| CAD | 1.67% | -1.17% | -0.34% | -1.28% | -1.33% | -1.73% | -1.43% | |
| AUD | 2.99% | 0.18% | 1.00% | 0.09% | 1.33% | -0.39% | -0.09% | |
| NZD | 3.38% | 0.57% | 1.40% | 0.53% | 1.73% | 0.39% | 0.31% | |
| CHF | 3.08% | 0.27% | 1.10% | 0.20% | 1.43% | 0.09% | -0.31% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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