Jackson Hole Potential Disappointment for EURUSD

Markets hope this weekend's Jackson Hole Symposium (JHS) will confirm significant policy easing, but there remains potential for some market disappointment.

All Points to a Downward Trajectory

In August, expectations around the Fed's interest rate decision for the rest of the year were radically recalibrated following weak economic data earlier that month. While recent rhetoric from some FOMC members has turned more dovish, the official interest rate projections have not been updated and still indicate just one rate cut. Meanwhile, markets are pricing in a high probability of four rate reductions across the next three meetings. There is ongoing debate around whether a "double" cut may occur in either September or October, with most favouring the latter.

Fed Chairman Jerome Powell will need to bridge the gap between these views in his speech on Friday. However, markets have previously overestimated the likelihood of rate cuts that did not ultimately transpire. As such, there is a real chance Powell's remarks will result in some level of market disappointment, given that he is unlikely to commit to 100 basis points of easing by year-end explicitly. Markets may accept a strong signal of a September decrease but the Fed also wants to avoid "deanchoring" inflation expectations, meaning letting markets believe too much easing is forthcoming risks inflation rebounding contrary to the Fed's goals.​

Rate Cut Imminent

The Jackson Hole Symposium often allows for major policy announcements; however, the Fed is not obligated to declare any changes. Furthermore, several speakers scheduled before Chairman Powell takes the stage may help build anticipation regarding potential actions. In any case, the Fed likely feels pressure to address analyst and economist concerns that the central bank is "lagging behind" and should have started easing policy sooner. The Bank acknowledges its policy is restrictive, and there is worry that recent poor economic data could have been avoided had they adopted a more neutral stance.

Given expectations around the FOMC, the US dollar has weakened, anticipating lower yields. Meanwhile, yields in the Eurozone have remained stable, as the ECB has already commenced easing, and it is expected to ease twice more this year. This is half the expected pace of the Fed, giving the Euro some relative strength as it has gained throughout the month. However, should Chairman Powell take a more balanced approach, markets may realise their prospects for a rate cut have been exaggerated, pushing yields back up. The consequent US dollar strength could cause the EURUSD rate to reverse course.​

EURUSD Could Be Heading Higher

In the short term, the EURUSD pair may form a double-top pattern at the July peak of 1.1278 if support holds at 1.11. Looking further ahead, the breakout from the triangle pattern suggests the pair could reach 1.1680 based on the measured-move projection, with 1.14 and 1.15 likely acting as key resistance levels. Should downside momentum pick up due to a potential reversal at 1.1150 or above, the pair may retest support at 1.095, but weakness below this level will depend on confirmation of the bearish trend below or at 1.10.​

Source: SpreadEx / EURUSD

Key Takeaways

Markets hope JHS will confirm significant monetary policy easing, but there remains potential for some market disappointment if expectations are not fully met. Powell must bridge the gap between official projections of one rate cut and market pricing in four cuts. While a signal of a September cut may be accepted, explicitly committing to a large amount of easing could risk inflation rebounding against the Fed's goals. The outcome remains uncertain and markets may have exaggerated prospects for aggressive rate cuts, potentially pushing yields and the US dollar higher if Powell takes a more balanced approach.​