The currency market is waiting for Jackson Hole – Commerzbank

This weekend, all the big names in central banking and economics will be meeting in Jackson Hole. In the past, Fed chairs have occasionally used this symposium as an opportunity to announce important policy changes. Now, it is common knowledge that the Fed could soon lower its key interest rate for the first time since the interest rate hikes of 2022/23 — that is, that another policy change is imminent. And that is why Jackson Hole is even more of a topic for the market than it is every year, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

USD is set to weaken further

“Now, an interest rate cut cycle that everyone and their brother is expecting should not be a particularly relevant thing. But it is. Because it’s all about the speed and (especially) the extent to which the USD carry is disappearing. And even more fundamentally, it’s about how the Fed deals with the conflict between inflation (core PCE at 2.6% versus the Fed’s target of 2%) and emerging economic risks. In other words, what I like to call the ‘policy response function’.”

“In this sense, it is not about whether Fed Chair Jay Powell will announce the long-awaited interest rate cuts in Jackson Hole. And it’s not about the initial rate-cutting pace in September, November and December. It should come as no surprise that after the surprising US labor market report on August 2, interest rate expectations for this year have recovered, but the USD has continued to lose ground.”

“It is how he explains and justifies them that matters. Because, since it is the Chair’s job to announce the consensus, Powell’s words are far more relevant than any individual voices from the FOMC, however wise they may be. The currency market may be acting in preparation for the coming events. If not all market participants feel sufficiently prepared for a potentially dovish message from the Fed Chair at current levels, the USD will have to weaken further.”