Jerome Powell expected to lay groundwork for September rate cut in Jackson Hole speech

• 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.