FX Daily: Lagarde and Powell Address Jackson Hole – Hawkish Expectations and Eurozone Concerns

FX Daily: Lagarde faces a harder test than Powell

The world’s two most prominent central bankers are both speaking at Jackson Hole today. The dollar has strengthened into the risk event and we think a hawkish tone by Powell is now largely priced in. Lagarde has to deal with a worsening economic outlook in the eurozone, but we suspect she will stick to data dependency and a hawkish tone. EUR/USD can rebound.

 

USD: Powell hawkishness looks largely in the price

Some Fed speakers laid the groundwork for today’s keynote speech by Fed Chair Jerome Powell at the Jackson Hole Symposium. This bulk of Fedspeak comes after a rather quiet summer in central bank communication. A couple of standouts from yesterday’s remarks: Patrick Harker (2023 voter) leaned on the dovish side and said that the Fed has “probably done enough” on policy tightening. Susan Collins (non-voter) also suggested the Fed may have to hold for some time but refrained from signalling where the peak is. We also heard from former Saint Louis Fed President James Bullard, who stuck to his usual hawkish rhetoric. Bullard’s successor is still to be named, but the St. Louis seat is not going to be voted for until 2025, so the impact shouldn’t be imminent.

So, what’s on the agenda for Powell today? Arguably, the backdrop has not changed dramatically since the FOMC rate announcement a month ago. The disinflation process has progressed in line with expectations, while key activity indicators have continued to prove resilient. Surely, the rather substantial revision in payrolls suggests a less rosy picture for employment than originally indicated, but we doubt that could be enough to trigger a change in the overall policy communication.

Powell will once again have to deal with his own Committee’s projections that see rates being raised one last time this year: he will probably reiterate the Fed is open to such a possibility and retains a data-dependent approach. Markets will hardly be surprised by that, or by any restatement that rate cuts are still a long way out.

The recent rise in US rates is surely complementing the monetary-policy-induced tightening of financial conditions, but given the stabilisation in the bond market following the July-August big sell-offs, we don’t think Powell will be overly concerned about prompting fresh UST weakness.

The recent firmness in the dollar probably factors in some of the markets’ expectations for a hawkish tone by Powell, so we don’t expect another USD rally today. Christine Lagarde’s speech may have a greater impact on the euro (as discussed below) and cause a DXY correction.