Macquarie analysts recently wrote that Federal Reserve Chairman Powell is expected to strike a dovish tone when he speaks at the Jackson Hole Economic Symposium, but is unlikely to be overly dovish.
Macquarie analysts also stressed that Powell's tone, as well as upcoming data and political developments, could influence the direction of the dollar in the coming weeks.
Specifically, they noted: “We would not be surprised by a dovish tone from Powell, which could have implications for FX markets and investor sentiment.” They added: “However, we doubt that Powell would be so bold as to sound very ‘dovish’.”
Analysts also noted that any post-rally rebound in Harris's support in polls next week could lead to further dollar weakness.
In its report, Macquarie linked Powell’s expected speech to broader market dynamics, particularly the recent decline in the U.S. dollar.
Macquarie noted that the U.S. dollar has experienced significant weakness over the past four weeks and attributed this to the unwinding of the "Trump trade" that supported a strong dollar.
Expectations that the European Central Bank and the Bank of England may not be able to match the Fed's rate cuts this year have also contributed to the dollar's decline.
Analysts further noted that wage growth in Europe could have an impact on the dollar’s near-term outlook.
They explained that recent indicators suggest that European inflation may remain a greater concern for ECB policymakers than for the Fed, particularly due to persistent services sector wage pressures.
Economists generally agree that the Fed is getting closer to conquering high inflation. However, few economists think Powell or other Fed officials are ready to declare "mission accomplished."
“I don’t think the Fed has to worry about inflation,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “The Fed is right to be more focused on employment than inflation at this point.”
How quickly the Fed cuts rates in the coming months will depend on economic data. This month, the government reported that hiring in July fell far short of expectations and the unemployment rate hit 4.3%, the highest in three years, sparking concerns that the U.S. economy could be heading for a recession. Healthier economic reports since then, including another drop in inflation and strong growth in retail sales, have largely allayed those concerns.
Wall Street traders currently expect the Federal Reserve to cut interest rates by 100 basis points this year, which means there could be a 50 basis point cut given there are only three meetings left in the year.
Some economists say signs of a further slowdown in hiring could increase the likelihood of a 50 basis point rate cut in September. The next jobs report is due on Sept. 6, after the Jackson Hole conference but before the Fed's next meeting in mid-September.
“Given the Fed’s focus on economic data, it will be difficult for Powell to pre-commit to a specific trajectory at Jackson Hole,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a research note.