European session review: USD mixed, as Fed chair Powell’s Jackson Hole speech remains in focus

USD traded mixed against other major currencies in the European session on Monday as investors continued digesting Federal Reserve chair Jerome Powell’s dovish-sounding speech at the Jackson Hole Economic Symposium last Friday.

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, increased 0.07% from the previous close to 100.79.

Powell acknowledged that the time had come to start cutting interest rates, given the heightened confidence that price growth is sustainably returning to the 2% target, diminished upside risks to inflation and increased downside risks to employment. However, the U.S. central bank’s boss highlighted that the policymakers are data-dependent and would make policy decisions on a meeting-by-meeting basis.

Powell’s remarks cemented the money market participants’ bets on a September start to the interest rate decreases in the U.S. According to CME FedWatch, they are now pricing in a 63.5% probability of a 25-basis-point cut by the Fed next month and a 36.5% probability of a 50-basis-point move.

Overall, markets are now predicting the Fed’s rates to be lowered by 100 basis points by the end of 2024 to 4.25-4.50%. Given that there are just three scheduled Fed meetings until the year-end it would imply that one of those three gatherings will deliver a 50-basis-point rate reduction.

Investors’ focus is now gradually shifting to Friday's release of the Fed’s preferred inflation metrics - the personal consumption expenditures (PCE) price index and core PCE price index -  which could influence rate expectations.

Economists expect the Fed’s preferred inflation data will confirm that price pressures continued to ease in July. If the PCE figures reveal a sudden rebound in price growth, markets may recalibrate their rate-cut bets.