Traders are building their positions in options contracts in preparation for a further decline in the value of the dollar, with expectations that Federal Reserve Chairman Jerome Powell will provide strong justification for cutting interest rates at the central bank’s annual meeting in Jackson Hole.
Traders pay higher prices for options contracts that make a profit if the dollar falls over the next week or month, compared to those betting on its rise, according to indicators of risk implications for a basket of major currencies pegged to the dollar.
This suggests that traders are preparing for the dollar’s fall ahead of the Jackson Hole meeting and the Federal Reserve’s monetary policy announcement in September. The Bloomberg dollar index is down 1.6% so far in August, hitting a five-month low on Monday.
Much of this decline is due to expectations that the Federal Reserve will cut borrowing costs in the United States by at least 25 basis points next month.
Since the United States is among the countries with the highest interest rates, any reduction in these rates will reduce the spread with other currencies, thereby enhancing the value of currencies that are not pegged to the dollar.
Gold is moving near anall- time high. And expectations of rising to this level
Gascon Hall Meeting
This year’s Jackson Hole meeting focuses on labor markets and reassessing the effectiveness of monetary policy. Many participants expect the Fed to signal a possible rate cut in September.
This annual meeting, held in Wyoming, is hosted by the Kansas Fed branch and brings together global central bankers.
He participates in the US Federal Reserve, the European Central Bank, and the Bank of England, where he has received important statements about the global economy and monetary policy.
According to Goldman Sachs, this year’s theme of the conference will focus on ‘Reassessing the effectiveness and transition of monetary policy’, which is the focus of academic discussions.
In contrast, the investment bank expects Powell’s speech and subsequent interviews to focus on relying on data and taking a cautious approach to cutting interest rates.
Fed Policy Direction
Powell is expected to reiterate the Fed’s willingness to act quickly if economic conditions deteriorate, while avoiding heavy monetary easing without additional data.
Overall, Goldman Sachs (NYSE:GS) views this seminar as a key event to gauge the Fed’s near-term policy direction, its impact on market sentiment and the global economic outlook.
However, the bank notes that the academic part of the seminar may influence the long-term policy direction, while the side interviews are expected to highlight immediate policy issues.
The Federal Reserve has kept interest rates in the range of 5.25 percent to 5.50 percent for more than a year now to slow economic growth and maintain downward pressure on inflation. Weak labor market data at the beginning of this month raised concerns among investors that the Fed had left policy tied for too long, and that it would need to cut interest rates by 50 basis points in September, if not earlier, to counter the impending recession.
Recent data, including a strong retail sales report earlier on Thursday, was more encouraging, suggesting that inflation is already falling but the economy is far from collapsing. Investors now expect the Fed to start cutting borrowing costs by a more common 25 basis points next month.
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