Will JP Reverse Last Year’s Speech At Jackson Hole?

With inflation coming down and Jackson Hole often a venue to announce policy shifts, all eyes are on the speech by the head of the Fed on Friday.

Setting Up Expectations

Last year, Fed Chair Jerome Powell through the markets in his brief intervention at the Jackson Hole Symposium, voling to bring down inflation no matter the cost. Market makers wonder if there will be a repeat, but in reverse, now that inflation has substantially declined in the last 12 months. There is still a large discrepancy between the Fed and market forecasts, with the former suggesting that there will be one more rate hike this year and money markets pricing in no more hikes. Traders will be interested to see if Powell's speech provides any concrete guidance for the November meeting, which is when the odds are that a rate hike will happen if the Fed goes through with it.

On the other hand, there are also reasons to think that nothing much will happen at the meeting. The Fed has long communicated that rates would remain high for a long time after peaking, and the dot plot has stood for months showing one more rate hike. If the Fed expects to end the rate hikes either now or in November, it won't be "news" from the regulators' perspective. There is still another round of key inflation and jobs data to be released before the next meeting, which could shape expectations again. Thus, Powell's speech could simply that a lot has been done to bring down inflation, but there might be another hike in the future.

Beyond Powell and the Fed

Although the Fed Chairman's speech is expected to be the event's highlight, other major central bankers are expected to speak. There will also likely be close attention to ECB President Christine Lagarde's which comes a couple of hours after Powell's. The Eurozone is in a distinctly different place than the US, with much higher inflation and slower growth, so there isn't as much expectation of a policy shift announcement. But, given the growing pressure from the Periphery, there are increasing questions about whether the ECB will moderate its hiking calendar or whether Lagarde will double down on the "too high for too long" rhetoric regarding inflation.

While central banks worldwide haven't been directly coordinating, they have faced a common problem that has seen interest rates rise globally. What could move market sentiment, in the end, is a general conclusion for whether the tightening trend will continue or moderate. A generalised perception that increasing borrowing costs might be coming to an end could be a catalyst - or the lack of meaningful change could end up disappointing traders and reignite the eurodollar’s downward trend.

EUR/USD Still in Upward Trend

After putting a top at a Feb ‘22 high of $1.1275, EURUSD has been under pressure, almost 4% lower near $1.085. Bearish price action could prevail with a successful breakdown outside the upwardly-tilted channel starting at $1.0515, with interim supports settled around $1.075 and $1.0635.

While trading within the channel, EURUSD could rebound towards $1.10, where a head-and-shoulders could form, sending the pair lower down once again. However, marching through the round resistance will increase the chances of an even larger H&S with the left shoulder at $1.11 instead. Only a break above there could see the eurodollar revisit 2023’s highs.

Source: SpreadEx / EURUSD

Key Takeaways

All eyes are on the Fed's speech at Jackson Hole Symposium for a potential policy shift. Last year, Powell vowed to tackle inflation, but now traders wonder if there will be a reverse announcement. There is a discrepancy between Fed and market forecasts for rate hikes, and Powell's speech may guide the November meeting, where a hike is expected. Other central bankers, like Lagarde, will also speak. Market sentiment hinges on whether the tightening trend continues or moderates.