- Fed Chair Jerome Powell is due to speak on monetary policy at the Jackson Hole Symposium.
- All eyes remain on Powell’s speech for fresh insights into the US interest-rate outlook.
- The US Dollar is set to rock with Powell’s speech influencing market pricing of Fed policy outlook.
US Federal Reserve (Fed) Chair Jerome Powell is scheduled to deliver a speech on “Economic Outlook and Framework Review” at 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 timing of the Fed’s first interest-rate cut of the year 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 looks to steer toward a policy-easing path as early as September.
In the July policy meeting, the Fed left the federal funds rate unchanged in the range of 4.25%-4.50%, but two policymakers dissented, with Fed Governor Christopher Waller and Fed Governor Michelle Bowman voting in favor of a 25 basis points (bps) rate cut. In a statement published a few days after the July meeting, Governor Waller explained that he dissented because he saw tariffs as a one-time price event that policymakers should “look through” as long as inflation expectations remain anchored. Governor Bowman argued that slowing growth and a less dynamic labor market make it appropriate to begin gradually moving the moderately restrictive policy stance toward a neutral setting.
The US employment data for July, however, revived concerns over worsening conditions in the labor market and fed into expectations of an interest rate cut in September. Nonfarm Payrolls (NFP) in the US rose by 73,000 in July, while NFP increases for May and June were revised down by 125,000 and 133,000, respectively. On the other hand, the latest Consumer Price Index (CPI) and Producer Price Index (PPI) data from the US hinted at sticky inflation, casting doubt about the number of rate cuts the Fed could opt for in 2025.
Against this backdrop, the US Dollar (USD) faces a two-way risk in the run-up to the highly anticipated Jackson Hole showdown.
How could Powell’s speech at Jackson Hole affect the US Dollar?
Although markets widely anticipate a rate cut at the Fed’s next policy meeting, they seem unsure about whether the US central bank will go for two or three cuts this year. According to the CME FedWatch Tool, there is a 33% probability of a total of 75 bps reduction in rates in 2025, against a 47% probability of 50.
In case Powell emphasizes worsening labor market conditions and adopts a cautious tone on the growth outlook, the USD could come under selling pressure with the immediate reaction. On the flip side, the USD could gather strength against its rivals if Powell downplays the disappointing employment data and reiterates that they need more time to assess the impact of tariffs on inflation before easing the policy in a steady way.
Analysts at TD Securities think that Chair Powell will communicate the Fed’s lean towards easing in September at Jackson Hole and explain:
“Although there is still more data to come, we believe Powell will suggest that economic conditions support policy recalibration. Downside risks to the labor market have grown, while tariff passthrough into inflation appears slower and more manageable than previously expected.”
Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for the US Dollar Index (DXY):
“The Relative Strength Index (RSI) indicator on the daily chart moves sideways near 50 and the US Dollar (USD) Index fluctuates in a tight range at around the 20-day and the 50-day Simple Moving Averages (SMAs), reflecting a neutral stance in the near term.
“On the upside, the 100-day SMA aligns as a key resistance level at 99.00 ahead of 99.60-100.00 (Fibonacci 23.6% retracement of the January-July downtrend, psychological level) and 101.55 (Fibonacci 38.2% retracement). Looking south, support levels could be spotted at 97.50 (static level), 96.45 (end-point of the downtrend) and 95.50 (mid-point of the descending regression channel).”
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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