US Dollar Whipsaws Around Powell’s Jackson Hole Speech

[MongiIG]

US DOLLAR OUTLOOK:

• The Fed’s main rate is currently 2.50%, holding at the upper bound of the so-called neutral rate of monetary policy. Fed Chair Powell’s comments suggest that the Fed’s main rate will move above 2.50% and stay there for some time.
• US Treasury yields are pressing higher, however, which may be the most important development coming out of Jackson Hole. If US Treasury yields retain their gains, they could help the US Dollar regain momentum and take some steam out of US equity markets.
• According to the IG Client Sentiment Index, the major USD-pairs collectively have a mixed bias.

 

Fed Chair Jerome Powell’s speech on Friday at the Jackson Hole Economic Policy Symposium introduced a bout of volatility across financial market.

He noted that “while the lower inflation readings for July are welcome, a single month's improvement falls far short of what we will need to see before the FOMC confident that inflation is moving down.”

Fed Chair Powell also commented that the “latest economic data have been mixed, and in my view,the US economy continues to show strong underlying momentum.”

He concluded that while the “decision at the September meeting will depend on the totality of the incoming data and the evolving outlook,” he also noted “with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.”

The Fed’s main rate is currently 2.50%, holding at the upper bound of the so-called neutral rate of monetary policy. Fed Chair Powell’s comments suggest that the Fed’s main rate will move above 2.50% and stay there for some time.

Expectations for Fed rate cuts in 2023 have moved back rapidly in recent weeks: after the July FOMC meeting, markets were discounting the first rate cuts in 1Q’23; following today’s speech at Jackson Hole, the first rate cuts are priced-in for 4Q’23.

 

Aug 26, 2022 | DailyFX
Christopher Vecchio, CFA, Senior Strategist