The forex market awaits Jackson Hole – Commerzbank

This weekend, all the big names in central banking and economics will meet in Jackson Hole. In the past, Fed presidents have occasionally used this symposium as an opportunity to announce major policy changes. It is now known that the Fed could soon cut its key interest rate for the first time since the 2022/23 rate hikes – meaning another policy change is imminent. And that’s why Jackson Hole is even more of a topic for the market than it is every year, notes Ulrich Leuchtmann, head of FX and Commodity Research at Commerzbank.

The USD is set to weaken further

“Now, an interest rate cut cycle that everyone and their brother is expecting shouldn’t be a particularly relevant thing. But it is. Because it’s all about speed and (especially) the extent to which the USD transport disappears. 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 2% target) and emerging economic risks. In other words, what I like to call the ‘policy response function”.

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

“It matters how they explain and justify them. Because, since it is the chairman’s job to announce the consensus, Powell’s words are far more relevant than any individual voice on the FOMC, however wise they may be. The foreign exchange market can act in preparation for future events. If not all market participants feel sufficiently prepared for a potentially accommodative message from the Fed Chair at current levels, the USD will have to weaken further.”