King Dollar and Central Bankers Gear Up for Jackson Hole

Written on 23/08/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Mighty Dollar Flexes Ahead of Jackson Hole

The great outdoors beckons for the great and the good in the monetary policy world as Wyoming welcomes Fed officials and many others to its annual Economic Symposium. The inflation beast is running rampant and needs to be tamed, and investors are hoping the Jackson Hole jamboree will give them some clarity on the FOMC’s intentions into year-end.

The Fed’s 46th annual pow-wow is entitled “Reassessing Constraints on the Economy and Policy” and kicks off tomorrow, with Chair Powell’s keynote speech scheduled to deliver remarks on the economic outlook on Friday at 15:00 BST. The event has historically been seen as a platform for Fed officials to signal its policy intentions and potential changes in the months ahead. In fact, some market watchers deem the conference as an unofficial policy meeting.

But this year, central bankers will be in the firing line, especially after Fed Chair Powell used his speech last year to suggest price pressures evident in the US economy would be “transitory”. Fast forward twelve months and inflation across the globe has hit multi-decade highs as Covid-19 supply chain issues linger and the Ukraine conflict has caused a growing energy and food crisis.

Citigroup, the giant US investment bank, is now even forecasting that UK inflation will rise above 18% in January. That is more than nine times the Bank of England’s two percent target. Certainly, there are now more question marks over central bankers and their approaches.

Markets hope the Federal Reserve will shed some light on how big future rate hikes will be and how strong the economy is to weather the expected continued policy tightening. US stocks have screamed higher over the summer, despite Fed warnings that expectations of a peak in inflation and a so-called dovish pivot from the central bank may be premature. Officials have consistently pushed back against the market’s pricing of a Fed turnaround to easing rates next year.

This has been met with partial success as rate cuts have been pushed further out of the curve. Closer to home, the September FOMC meeting has edged towards a jumbo-sized 75bp rate hike this week, though bets are not much more than a coin toss.

The dollar has strengthened sharply in the build-up to the confab as the US 10-year Treasury yield has regained the 3% marker and two of the major pairs, the euro, and pound, have posted new cycle lows. For sure, the ongoing energy shock is still biting hard into the latter, forlorn currencies.

Bottom Line

Has the market now got ahead of itself on Powell’s likely hawkish message on inflation fighting? A less strident speech may pare US dollar longs back as the dollar index enters the overbought territory. Whatever happens, it could be a time for central bankers to also re-evaluate some of their philosophies.

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