Dollar Under Pressure: Jackson Hole Takes Centre Stage
Key Highlights
- The US dollar starts the week on the defensive, trading near multi-month lows as investors remain uneasy over US government debt, elevated long-term Treasury yields and the Treasury’s decision to double long-dated bond buybacks.
- Sterling recorded a fourth consecutive weekly gain, with GBP/USD finishing last week around 1.3660 and reaching its strongest levels since February. Higher UK inflation and expectations that the Bank of England may still need to tighten policy have supported the pound.
- The euro remains well supported, with EUR/USD pushing towards the 1.17 area after stronger eurozone activity data and increasingly hawkish expectations for the ECB.
- Central-bank divergence remains the dominant FX theme. The Fed is currently holding rates at 3.50%–3.75%, the BoE at 3.75%, while the ECB deposit rate stands at 2.25%. Markets are increasingly questioning whether the Fed can tighten further while expectations for additional ECB and BoE tightening have supported EUR and GBP.
- Jackson Hole is the main event this week. Fed Chair Kevin Warsh’s Friday address will be closely watched for clues on inflation, the Fed balance sheet and the future direction of US monetary policy.
- Wednesday brings a major US data test, with Core PCE, preliminary GDP and the GDP Price Index all due together. A hotter inflation print could quickly revive Fed tightening expectations and provide the dollar with some relief.
Market Recap…
The dollar came under sustained pressure last week as investors reassessed the outlook for US monetary policy and became increasingly concerned about the health of the Treasury market. Softer US employment, retail sales and inflation readings had already reduced expectations for another near-term Fed hike before Treasury plans to increase long-dated bond buybacks added to fiscal concerns. The WSJ Dollar Index consequently fell 0.74% over the week, its largest weekly decline since late July.
Sterling was one of the main beneficiaries. GBP/USD climbed towards 1.3660, completing its fourth consecutive weekly advance as UK inflation rose to 2.9% and markets continued to price some risk of further BoE tightening. The euro also strengthened, with EUR/USD moving from around 1.16 towards 1.17, helped by a eurozone composite PMI of 52.1 and manufacturing activity reaching a 54-month high.
Our Thoughts for the Week Ahead…
The balance of risks initially remains tilted towards a softer dollar, but this week’s calendar provides several opportunities for that trend to reverse. Wednesday’s Core PCE reading will be particularly important: a print above the 0.2% monthly forecast could reignite concerns about persistent US inflation and lift Treasury yields and the dollar. Conversely, softer PCE combined with disappointing GDP would reinforce the argument for the Fed to remain on hold.
For GBP/USD, the recent rally leaves sterling in a relatively strong position, although levels around and above 1.37 may become increasingly difficult to sustain without additional UK-positive catalysts. The euro should also remain supported while markets entertain the possibility of an ECB hike in September.
The week’s biggest potential volatility event, however, is Fed Chair Warsh’s Jackson Hole speech on Friday. With markets questioning US fiscal credibility and the Fed’s future policy path, any clear hawkish signal could spark a sharp dollar recovery. A cautious or ambiguous message would leave EUR/USD and GBP/USD with room to extend their recent gains.
Economic Calendar
Monday
7:00PM US Treasury Secretary Bessent Speaks
Tuesday
3:00PM US CB Consumer Confidence
Wednesday
1:30PM US Core PCE Price Index m/m
1:30PM US Preliminary GDP q/q
1:30PM US Preliminary GDP Price Index q/q
Thursday
1:30PM US Unemployment Claims
All Day US Day 1 Global Jackson Hole Symposium
Friday
3:00PM US Fed Chair Warsh Speaks
3:00PM US Preliminary Benchmark Payrolls Revision
3:00PM US Revised University of Michigan Consumer Sentiment
3:00PM US Revised University of Michigan Inflation Expectations
All Day US Day 2 Global Jackson Hole Symposium