Powell may not dare to sing "dove" boldly, is the US dollar in short-term trouble?

Macquarie analysts recently pointed out in an article that Federal Reserve Chairman Powell is expected to adopt a moderate tone during his speech at the Jackson Hole Economic Symposium, but is unlikely to be too dovish.

The analysts at Macquarie also emphasized that Powell's tone, along with upcoming data and political developments, may influence the direction of the US dollar in the coming weeks.

Specifically, they stated: "We would not be surprised by Powell's moderate tone, which could impact the foreign exchange market and investor sentiment." They added: "However, we doubt whether Powell will be so bold as to sound very 'dovish'."

Analysts also noted that any rebound in support rates for Harris in next week's polls could further weaken the US dollar.

Macquarie linked Powell's expected speech in the report to broader market dynamics, especially the recent decline in the US dollar.

Macquarie pointed out that the US dollar has experienced significant weakness in the past four weeks, attributing it to the unwinding of the "Trump trade" that supported a strong US dollar.

Expectations that the interest rate cuts by the European Central Bank and the Bank of England this year may not be on par with those of the Federal Reserve have also contributed to the dollar's decline.

Analysts further pointed out that wage growth in Europe may impact the near-term outlook for the US dollar.

They explained that recent indicators suggest that inflation in Europe may still be a more pressing concern for European Central Bank policymakers compared to the Federal Reserve, especially due to ongoing wage pressures in the service sector.

Economists generally believe that the Federal Reserve is getting closer to taming high inflation. However, few economists believe that Powell or other Fed officials are ready to declare "mission accomplished."

Tom Porcelli, Chief US Economist at PGIM Fixed Income, said: "I don't think the Fed needs to worry about inflation. At this point, the Fed is right to focus more on employment than inflation."

The pace of future rate cuts by the Federal Reserve will depend on economic data. A government report this month indicated that job growth in July was well below expectations, with the unemployment rate reaching 4.3%, the highest in three years, raising concerns about a possible recession in the US. Subsequent healthier economic reports, including a further decline in inflation and strong retail sales growth, have largely alleviated these concerns.

Wall Street traders currently expect the Fed to cut rates by 100 basis points this year, with only 3 meetings left in the year, implying a potential 50 basis point cut at one of the meetings.

Some economists point out that if there are signs of further slowing in job growth, the likelihood of a 50 basis point rate cut by the Fed in September will increase. The next employment report will be released on September 6, after the Jackson Hole conference but before the Fed's next meeting in mid-September.

Matthew Luzzetti, Chief US Economist at Deutsche Bank, said in a research report: "Given the Fed's focus on economic data, Powell is unlikely to commit to a specific trajectory at Jackson Hole in advance ”