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A 'dovish' turn by the Federal Reserve Chair in Jackson Hole isn't a nailed-on certainty.
The Dollar stands to rally if the Chair of the Federal Reserve, Jerome Powell, indicates that the Fed won't be pulling the lever on a rapid succession of interest rate cuts.
He addresses the central banking conference in Jackson Hole, Wyoming, on Friday at 14:00 GMT. This will be Powell's final address to the conference as Fed Chair, and investors are anticipating some substance, as he has used the annual event to signal changes in Fed direction in previous years.
Markets are entering a holding pattern in anticipation, but August's fall in the Dollar and rise in stock values confirms investors head into the event expectant that Powell will greenlight a September rate cut is likely, while signalling further cuts are possible.
This leaves traders highly exposed to disappointment: for the Dollar, any paring back of rate cut bets would be outright supportive.
"We see a risk of Powell being non-committal in Jackson Hole on Friday," says Daniel Von Ahlen, an economist at TS Lombard. "Markets are overpricing the odds of a September Fed cut."
Disappointment would see the Pound to Dollar exchange rate extend this week's decline, targeting 1.3398 ahead of 1.3364.
Some look for a deeper retracement: "Powell's remarks could influence market sentiment and exacerbate GBP/USD weakness. Should Powell maintain his steady, more-hawkish tone, the pair may test key support at 1.3250, the 50% Fibonacci retracement level of 1.2712-1.3787," says Paul Spirgel, a Reuters market analyst.
"Last year, Jackson Hole was pivotal in sending a signal that rates would be cut in September," says Rogier Quaedvlieg, Senior U.S. Economist at ABN AMRO. "With pivotal data releases between his speech and the FOMC meeting, Powell will not want to commit. The macro outlook remains murky, with inflation rising, but not surging, and the labour market weakening, but not crashing."
This month's below-consensus inflation and job prints prompted investors to place bets on the central bank cutting interest rates in September, pressuring the Dollar and boosting stocks. Pressure from the U.S. administration also encouraged such bets, with Treasury Secretary Scott Bessent saying a 50bp cut was in order.
However, analysis from TS Lombard shows U.S. CPI inflation has shown signs of reaccelerating, with the services component surprising to the upside, while CPI inflation breadth (the number of items running >2% m/m inflation) climbed to 57% (it was at 40% when the Fed started cutting back in September last year).
"Even if the FOMC does cut in September, the case for sequential cuts isn’t obvious," says Von Ahlen. "GBP/USD is likely to remain under pressure amid persistent UK fiscal concerns and position pruning ahead of the upcoming Jackson Hole conference," adds Spirgel.
Image courtesy of TS Lombard.
Jackson Hole disappointment would help the Dollar just as the Pound wrestles with domestic concerns. Midweek's UK inflation numbers showed an above-consensus pickup in July, lowering the odds of another Bank of England rate cut in September.
On paper, this reduction in rate cut bets should have bolstered the Pound against the Dollar as a supportive divergence in central bank policy is underway.
However, we noted that markets actually increased bets for interest rate cuts in 2026, suggesting that a pause now will only be followed by more aggressive cutting later. It explains why the Pound ended lower on the day.
The UK's rising inflation rate is also not the result of a hot economy, meaning it is not the kind of currency-supportive inflation. In fact, rising inflation and a stagnant economy speak of stagflation.
"A stagflationary backdrop is not currency supportive," says Justin McQueen, a market analyst at Reuters.
Above: UK inflation is proving stubborn.
Foreign exchange strategists are also concerned about the UK's growing financial debts which will require Chancellor Rachel Reeves to cut spending and/or raise taxes in November.
The Treasury is sounding out a series of tax rises via the media, as is typically done by government ahead of the budget.
"The latest UK consumer price index (CPI) and retail price index (RPI) data exceeded forecasts, further intensifying worries about fiscal stability in the UK, particularly as the country grapples with a frothy current account deficit," says Spirgel. "This has left global investors cautious."