USD into Jackson Hole: policy signalling matters more than headlines

I’m framing today’s market view around one idea: policy optionality, not grand pivots. With Jackson Hole in focus, I expect Chair Powell to lean into a data-contingent easing narrative rather than pre-committing to a fixed path. That nuance matters for FX: it keeps front-end U.S. rates reactive to each incremental print while allowing risk assets and high-beta FX to trade the “glide path” rather than an abrupt turn.

Where we stand

Pricing for the September FOMC implies a modest cut is still on the table, with markets watching whether Powell validates that skew after a materially softer U.S. labour backdrop through July (including downward revisions). Minutes from the July meeting didn’t change the cut odds materially, but they did reveal an internal debate: upside inflation risk was still viewed as the “greater” risk at that time, even as some officials began to acknowledge cooling employment. That balance likely tilted more dovish after the weak July NFP, which the minutes could not capture.

At the same time, politics has re-entered the monetary frame. President Trump’s public pressure on the Fed including calls for Governor Lisa Cook to resign and an explicit preference for lower rates, raises perceived risks around central-bank independence over the next year, especially as Board composition evolves and the Chair’s term ends. Markets may not price institutional change day-to-day, but the tail risk is clear: if policy credibility is questioned, USD risk premia widen even in a slowing economy.

The FX read-through

USD broad tone: The path of least resistance remains gently lower if Powell acknowledges softer labour conditions while preserving flexibility. A “measured, data-led easing” message should flatten front-end volatility but keep the curve somewhat steeper against peers, historically consistent with a softer dollar when growth leadership narrows.

EUR/USD: Eurozone PMIs remain the swing factor, but if U.S. guidance softens without a European downside surprise, dips toward support should attract buyers. Near-term topside requires confirmation that U.S. cuts are front-loaded rather than grudging.

USD/JPY: A nuanced Fed plus any hint of higher-for-longer term premia in the U.S. typically caps downside in UST yields and tempers JPY strength. The cleanest yen impulse still comes from term-premium compression; absent that, JPY rallies fade.

Gold & rates sensitives: A “cuts-soon-but-gradual” signal is gold-supportive via real-rate expectations, while cyclicals prefer evidence the labour slowdown is not morphing into a demand stall.

What I’ll listen for in Powell’s keynote

Labour-market characterization. Does Powell formally acknowledge a sharper slowdown in employment growth and revisions, or keep the lens on “gradual cooling”? The former validates September easing; the latter keeps markets leaning but not committed.

Inflation asymmetry. July minutes still leaned toward upside inflation risk, with uncertainty around tariff pass-through timing. Any pivot toward symmetric risks, or explicit recognition that employment risks have risen, would be meaningful for USD.

Operational guidance. Hints on front-loaded vs. graduated cuts matter. A front-loaded preference weakens the dollar more quickly; a staircase approach blunts the FX impulse but extends the trend.

The political overlay: why it’s not noise

Public campaigns to influence the Fed rarely move the immediate policy setting, but they can affect term and currency premia by altering perceived independence. With three of seven governors now appointed by President Trump, and potential further appointments over the next year, the market will price some probability that the reaction function shifts toward looser policy even if inflation risk lingers. That combination, easier policy bias plus inflation ambiguity, is inherently USD-negative at the margin and supports a steeper U.S. curve versus a lower front end.

Trading framework (disciplined, not dogmatic)

Base case (55%): Powell validates data-contingent easing without calendar commitments. USD softens modestly; buy EUR/USD on dips, fade USD/Asia strength selectively, stay constructive gold on real-rate drift.

Hawkish risk (25%): Emphasis on sticky core services, tariff uncertainty, and “not there yet.” Front-end U.S. yields reprice higher; USD pops, especially vs. low-yielders. Keep powder dry for better USD shorts post-move.

Dovish surprise (20%): Clear tolerance for near-term easing or explicit concern about labour deterioration. USD underperforms broadly; beta FX and metals lead.

Today’s tape bombs to watch

Pre-Powell flow still bends around U.S. Initial Jobless Claims and global PMIs; any downside labour signal or softening services activity reinforces the base case above. Short-dated gamma remains sensitive into headlines; my preference is to avoid paying up for optionality unless we see extreme pre-event compression.

I’m positioned for a measured USD drift lower into and through Jackson Hole if Powell endorses flexibility and acknowledges labour softness. The bigger, slower-burn theme is institutional: perceived pressure on Fed independence can bias USD weaker by lifting risk premia even in a mixed macro tape. I’ll trade levels, not narratives, but I’ll let those narratives inform which levels I respect.

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