Global money markets are closely watching Fed Chairman Jerome at the Jackson Hole Symposium this week. Recently, expectations about the Fed’s monetary policy have changed quickly. The data from July made it less likely for significant , and expectations for the September meeting have become more focused.
If Powell speaks cautiously, markets think the US dollar might strengthen against other major currencies. This is particularly true because the market still expects significant rate cuts, and careful messaging could boost the .
How Can the Fed Move on the Inflation-Employment Dilemma?
The US economy has been sending mixed signals lately. On one hand, strong show that consumer spending is robust. On the other hand, rising import prices suggest that tariffs are pushing costs higher. This situation keeps the risk of alive, as these costs could soon affect retail prices. Meanwhile, the job market has weakened significantly. The three-month average rose to 4.2%, and over the same period slowed to 35,000.
Last year, when faced with a similar situation, Powell indicated in his Jackson Hole speech that a rate cut was coming. However, the current situation is more complex. Inflation data has sharply increased, with the overall rate at 3.5% and the at 3.7%. This makes it hard for the Fed to make quick decisions.
Therefore, Powell might not be as optimistic about rate cuts this year. Instead, he is likely to take a cautious and flexible approach, highlighting that they are closely monitoring both employment and inflation trends.
Trump-Putin Meeting and the Possibility of Peace
Geopolitical events also play a key role in influencing the direction of the US dollar. Last week, a meeting between US President Donald Trump and Russian President Vladimir Putin raised hopes that the Ukraine crisis could be heading towards a new phase.
Putin’s agreement to allow the US and Europe to offer Ukraine security guarantees similar to NATO’s Article 5 suggests that progress might be possible. However, unresolved issues concerning Russia’s demands over Donbas and Crimea remain significant hurdles.
For the markets, this situation can be interpreted in two ways: If a ceasefire becomes more likely in the short term, the reduced risk could decrease demand for the US dollar. On the other hand, if negotiations stall or break down, the (DXY) might rise as investors seek safe havens. Consequently, every update from the peace talks will have a direct impact on the US dollar’s trajectory.
Market Pricing and Expectations
In the interest rate markets, the chance of a 50 basis point cut in September, once as high as 60%, is no longer being considered. Expectations have instead dropped to below 25 basis points, around 20 basis points. This reflects a general belief that the Fed won’t make any drastic moves.
Investors are keen to see how Powell will address these expectations. If his speech highlights the seriousness of inflation and warns against making quick decisions, the US dollar index might strengthen. Conversely, if Powell delivers a more optimistic message focusing on weak employment, we can expect the US dollar index (DXY) to decline.
US Dollar Technical Outlook
The US dollar index began the week just below 98, a crucial level in the pullback phase since it hit 100. The 98 mark acts as a midpoint in the stabilization phase following the slowdown of the main downward trend. Currently, there’s also focus on the short-term support trend around 97.85.
If the index closes below this support level on a daily basis, it could drop toward its main support at 96.50. Conversely, if events occur that boost demand for the US dollar, we might see the index rise to around 99.50.
Powell’s speech at the Jackson Hole Symposium could trigger a breakout from this narrow range. In the short term, if Powell takes a cautious stance, the US dollar index could approach 100. However, if he signals significant rate cuts, the index might drop below 97.
In summary, three key factors will influence the US dollar in global markets this week: the Fed’s interest rate policy, peace talks involving the US, Russia, and Ukraine, and the inflation-employment dilemma highlighted by US economic data. Powell’s upcoming speech will address these crucial factors at a pivotal moment. The Fed’s guidance will not only cause short-term market movements but will also affect expectations for rate cuts throughout the year.
In the near term, the US dollar is expected to move between 97 and 99 before Jackson Hole. If Powell takes a cautious approach, the US dollar might strengthen and approach the 100 mark, potentially putting pressure on emerging market currencies.
On the other hand, if Powell highlights employment concerns and suggests possible rate cuts, the US dollar could dip below 97. This could lead to a rise in gold prices and riskier assets.
Additionally, if the Fed takes its time in cutting interest rates, the US dollar may gradually strengthen over the rest of the year. However, if a lasting ceasefire is achieved in Ukraine, it could reduce safe-haven demand, limiting this strengthening trend.
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