Chairman Powell’s speech unlikely to change current market dynamics – MUFG

Dollar continues to strengthen ahead of Jackson Hole speeches. MUFG Bank economists analyze the outlook for the dollar.

Rate Hike Expectations Could Change if Powell Delivers a Mild Surprise

We do not expect Fed Chairman Jerome Powell’s speech today to change current market dynamics.

If the Fed chair does comment on the outlook for monetary policy, we would expect him to signal that the Fed is nearing the end of its rate hike cycle and future policy decisions will be data driven. At the same time, we expect him to reiterate that the Fed plans to keep rates on hold for some time before starting to lower rates next year, when they are more confident that inflation continues to fall back toward their 2.0% target.

Following today’s Fed Chairman Jerome Powell’s speech, the US interest rate market is expecting a hike of around 5 basis points at the September FOMC meeting and 14 basis points in November. We do not expect these expectations to change significantly today, unless Chairman Powell delivers a mild surprise and formally ends the rally cycle, which seems unlikely.

For next year, the US interest rate market is already forecasting cuts of around 96 basis points. At the current juncture, we do not expect Fed Chairman Mr. Powell to strongly oppose these expectations.