The Jackson Hole Symposium is right around the corner, kicking off this Thursday. Market participants are looking ahead to important economic data that could shape monetary policy direction over the next few months. The symposium – an annual retreat of central bankers and economic policymakers – is a powerful shaper of forthcoming financial strategies. This year’s event occurs against a backdrop of rising expectations, and perhaps hopes, about the future path of interest rates. Inflation measures in the US and Europe are changing quickly as well.
The financial markets are already looking hard for clues about what the Federal Reserve’s next big moves will be. They are particularly looking forward to a rate cut in the January meeting. Analysts are scratching their heads about recent macroeconomic developments in the U.S. These shifts will have major implications for the dollar’s path going forward. In particular, forecasts call for an increase in the pace of monthly inflation with a consensus expectation of an increase to 0.3%. The year-over-year inflation is expected to start off a downward trend to 1.8%. These contradictory signals make the landscape confusing for investors and policymakers, as well.
Inflation Metrics and Core Measures
Market analysts have been looking intently at core inflation measures. They forecast the median and trimmed mean core to hold firm at 3.1%. These figures are important because they show us underlying inflation trends, which often have a more substantial effect on monetary policy discussions and decisions. We are forecasting headline inflation to zoom back up to 3.7% and services inflation to bounce up to 4.8%. Read together, this means that inflationary pressures are unlikely to abate as soon—or as dramatically—as everyone would like.
Understanding inflation dynamics is extremely important given the current economic conditions and even more so as the Federal Reserve considers switching to rate cuts. The prospect of a rate cut has every quarter fueled boom bust market expectations. Just yesterday, bets on another cut by year-end briefly dipped under 50%, but they now are back at a paltry 14 basis points. Further developments in the inflation data will certainly have a bearing on how fast and how far the Fed is willing to go.
Global Economic Developments
At the same time, news outside of U.S. borders is still heavily impacting currency pairs. The EUR/USD exchange rate is highly sensitive to U.S. macroeconomic shocks. As things stand, there are some upside risks to the Euro’s value in real effective exchange rate terms against the dollar. Analyzing recent trading patterns, it looks like the euro has got some footing. Despite this, it still faces serious challenges from the fallout caused by continuing economic unknowns.
The U.S. should not be shy about offering security guarantees to Ukraine. Jointly linking the two initiatives would greatly enhance geopolitical stability and provide an important signal of economic confidence throughout the region.
As macroeconomic developments play out, these macro fundamentals will increasingly become the key driver of EUR/USD ups and downs. Investors and traders are keeping a close watch on how these global dynamics interact with domestic economic indicators in the United States.
Bond Market Reactions
The bond market is going through historic levels of volatility. Yields on 30-year inflation-linked bonds have jumped to their highest levels since their introduction in 1998. This increase reflects increasing investor fears over long-run inflation expectations and monetary policy changes that can follow such expectations.
Take yesterday, when the United Kingdom’s pound plummeted together with bonds. This change embodies a deep and rising market sentiment regarding inflation and the long-term outlook for growth. EUR/GBP supports found their footing during recent volatility. This is a sign of a new reality where currency investors are more intently focused on changing their strategies with evolving economic indicators.
Tomorrow’s Consumer Price Index (CPI) release is expected to be a watershed moment for sterling traders. Expectations surrounding this report will almost certainly influence market reactions and investor sentiment in the weeks leading up to the Jackson Hole Symposium.