MARKETS IN HOLDING PATTERN AHEAD OF JACKSON HOLE

There is a strong expectation that the Fed will signal the markets are correct in predicting a rate cut for September, but that opens the possibility of a hawkish surprise.

Key Factors in Focus

• Fed Chair Powell is expected to update economic projections and discuss the path of interest rates going forward.
• The market is pricing in an 80% chance of a rate cut, looking to Powell's comments for confirmation.
• FOMC minutes were more hawkish, as members already expressed concern about a weakening labour market.

Delivering on Market Expectations

The ahead of the Fed's annual symposium at Jackson Hole, Wyoming. Tech stocks have underperformed, and yields have tentatively risen as traders seem hesitant to take on risk before Friday, when Fed Chair Jerome Powell is expected to make the keynote speech. Traditionally, the event has been the setting for the Fed to give the market advance notice of a change in policy at the next meeting in September. With the Fed holding rates steady all year, that the policy change will be towards easing. The odds are similar for a second rate cut by the end of the year.

Those odds were slightly higher before the release of the . At the last meeting, the Fed controversially decided to keep rates unchanged. Two members voted against that decision, the largest dissent since 1993. The policy statement and Powell's speech afterwards noted a strong economy and solid jobs market as reasons not to change policy. But, two days later, the July NFP was well below expectations, with the May and June reports revised drastically lower. This was the catalyst for the markets to nearly entirely price in a rate cut for September. Then, the minutes showed that the FOMC did discuss the labour situation, noticing that it was becoming weaker. Despite that, the members still decided to hold rates. That could mean that the deterioration of the job market, with unemployment still below the structural level, might not be enough to convince a majority of members to cut at the September meeting.

Clarifying the Rate Path Forward

Traders are expecting Powell to use , not just for September, but beyond. Future markets are pricing in a more than 80% chance of at least a second rate cut by the end of the year. That would be in accord with the Fed's "dot-plot" matrix from June for two cuts in the second half. Powell is expected to update his outlook for the economy, with traders focusing on whether he emphasises inflation or the jobs market to see which part of the Fed's dual mandate is getting more consideration. Additionally, the Fed had previously suggested it could tolerate inflation rising to 3.0% as it looked at long-term price stability. Some analysts have suggested that the Fed may signal its intention to maintain the 2.0% target, despite the elevated inflation seen in the post-pandemic period. This could also be a hawkish signal for the markets.

Downward Momentum Still in Place for EURUSD

The EURUSD has been trending lower over the last couple of weeks as the dollar drifted upwards on a steepening yield curve ahead of the Jackson Hole Symposium. The pair appears to be forming a double bottom, but with RSI still not in overbought territory and the Bollinger Bands tilting downwards, it could break through. The next support is at the psychological 1.1600 level, which held firm two weeks ago amid positive US earnings that supported the dollar. A break below could head to the next support at the early August swing low of 1.1540. To the upside, resistance can be found at 1.1670, the swing high just before the release of the FOMC minutes, followed by the swing high at 1.1720 if the upper band at 1.1700 gives way to bulls.

Source: SpreadEx | EURUSD