USD

The Jackson Hole symposium is poised to become a defining moment for Federal Reserve Chair Jerome Powell, who delivers his final address at the event. Markets are watching closely to see if he validates expectations for a September interest rate cut, yet the confidence behind those bets appears fragile.

The circumstances differ markedly from last year. In 2024, rising unemployment and fears of recession pushed the Fed to act. Now, after reducing rates by a full percentage point, inflation remains sticky and the labour market shows only modest signs of cooling. Despite this, traders continue to treat a September cut as highly likely, though the probability has been marked down from 95% a fortnight ago to around 70%.

This recalibration has already boosted the US dollar, lifting it against major peers. Equity markets show a similar repositioning, with defensive sectors such as health care, real estate, and staples faring better while technology shares lag. The political backdrop complicates Powell’s stance further, with pressure from the administration and the recent appointment of dovish policymaker Stephen Miran raising questions about central bank independence. Powell’s words at Jackson Hole could either cement his legacy as a firm defender of data-led policy or expose him to charges of bending to political demands.

GBP

In the UK, tentative optimism has emerged after flash PMI figures pointed to faster economic growth through August. Services drove the expansion, reaching a one-year high, while manufacturing showed signs of stabilisation despite remaining in contraction. The composite index rose to 53.0 from 51.5, its strongest reading in a year, with new business volumes rising at the quickest pace since late 2024.

Nevertheless, sterling has been under pressure. GBP/USD has fallen by 1.2% this week, slipping below $1.34. Renewed cost pressures are partly to blame, with input inflation at its highest since May, driven by the increase in National Insurance contributions. Meanwhile, steady July inflation of 3.8% has cooled expectations of imminent Bank of England easing, with markets now assigning a 57% probability of the policy rate staying at 4.00% through the end of the year.

Confidence has also been unsettled by the unexpected postponement of retail sales data due to quality concerns. Questions about the reliability of official statistics may weigh further on sentiment if not addressed.

EUR

The euro has weakened by around 1% against the dollar this week, even as Eurozone PMI figures surprised positively. The composite index climbed to 51.1 in August, signalling the fastest private-sector growth since May 2024. Encouragingly, manufacturing returned to expansion for the first time in more than three years, while services continued to grow. Yet optimism remains thin, with business confidence deteriorating for a second month due to trade worries and structural headwinds.

The looming threat of fresh US tariffs continues to cast a shadow. A proposed deal could see 15% duties placed on EU exports such as pharmaceuticals, autos, and metals, replacing harsher levies but still fuelling uncertainty. Meanwhile, global PMI data from India and Australia suggested a modest upturn in world activity, though investors remain cautious in the run-up to Powell’s speech.

Market sentiment has darkened, with equities slipping, volatility climbing, and pro-cyclical currencies retreating. EUR/USD has broken below $1.16 and its 21-day moving average, with a further slide towards $1.14 possible if bearish momentum continues.

Looking ahead

Markets enter Powell’s address with high expectations but significant doubt. Should he stress inflation risks and reiterate the Fed’s commitment to data dependence, risk assets could struggle, and the dollar may strengthen further. Conversely, if he hints at an early resumption of rate cuts, the relief rally could lift equities and weigh on the greenback.

For sterling and the euro, domestic data will continue to provide direction, but both remain vulnerable to broader shifts in global risk sentiment and the Fed’s policy stance. With inflationary pressures persisting and political dynamics adding further uncertainty, the weeks ahead may prove decisive for currency markets.