Jackson Hole: Powell Faces Pivotal Test as Markets Eye Fed Policy

USD
The Jackson Hole symposium is set to be a defining moment for Federal Reserve Chair Jerome Powell, who delivers what may be his most scrutinised address yet. Investors are watching closely to see whether he confirms expectations for a September interest rate cut – but confidence behind those bets is beginning to waver.

This year’s backdrop is very different from 2024. Then, rising unemployment and recession fears forced the Fed’s hand. Now, despite a full percentage point of rate reductions, inflation remains stubborn while the labour market shows only modest cooling. Traders still view a September cut as highly likely, though the probability has slipped from 95% two weeks ago to around 70%.

This recalibration has lifted the US dollar, with gains against major peers. Equity markets reflect the same caution – defensive sectors such as health care, real estate and consumer staples are outperforming, while technology stocks lag behind. Politics adds another layer of complexity, with pressure from the administration and the recent appointment of dovish policymaker Stephen Miran raising concerns over central bank independence. Powell’s remarks could either reinforce his image as a staunch defender of data-driven policy or fuel criticism that he is bowing to political pressure.

GBP
In the UK, there are tentative signs of improvement after flash PMI data showed faster economic growth in August. Services led the expansion, reaching a one-year high, while manufacturing displayed stabilisation despite staying in contraction. The composite index climbed to 53.0 from 51.5 – the strongest reading in twelve months – with new business volumes growing at the fastest pace since late 2024.

Yet sterling remains under pressure. GBP/USD has dropped 1.2% this week, slipping below $1.34. Rising cost pressures are a key factor, with input inflation at its highest since May, driven in part by higher National Insurance contributions. Inflation held steady at 3.8% in July, which has cooled hopes of an imminent Bank of England rate cut. Markets now see a 57% chance that the policy rate will remain at 4.00% until year-end.

Confidence has also been dented by the unexpected postponement of retail sales data due to quality concerns. Any further questions over the reliability of official statistics risk weighing on sentiment.

EUR
The euro has weakened by about 1% against the dollar this week, even as Eurozone PMI data surprised to the upside. The composite index rose to 51.1 in August – the fastest pace of private-sector growth since May 2024. Manufacturing returned to expansion for the first time in over three years, while services continued to grow. However, business confidence has declined for a second month, pressured by trade concerns and long-term structural challenges.

The threat of new US tariffs also looms large. A proposed agreement could see 15% duties applied to EU exports such as autos, pharmaceuticals and metals. While this would replace harsher levies, it still adds uncertainty. Meanwhile, PMI figures from India and Australia suggested a modest pick-up in global activity, though investors remain cautious ahead of Powell’s speech.

Market sentiment has turned darker, with equities sliding, volatility rising and pro-cyclical currencies retreating. EUR/USD has fallen below $1.16 and under its 21-day moving average, with a further move towards $1.14 possible if bearish momentum continues.

Looking Ahead
Markets approach Powell’s Jackson Hole address with high expectations – and considerable doubt. Should he emphasise inflation risks and the Fed’s commitment to data dependence, risk assets could come under pressure and the dollar may extend its gains. Conversely, any hint of an early resumption of rate cuts could spark a relief rally in equities while weighing on the greenback.

For sterling and the euro, domestic data will continue to play a role, but both remain highly sensitive to shifts in global risk appetite and the Fed’s next steps. With inflation proving persistent and political dynamics adding further uncertainty, the weeks ahead could prove decisive for global currency markets.

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