FX Weekly Update: Dollar Claws Back Ground After Jackson Hole Dip

Dollar claws back ground after Jackson Hole dip
The U.S. dollar began the week on stronger footing, recovering much of the ground it lost after Jerome Powell’s dovish Jackson Hole speech on Friday. Thin liquidity during the UK bank holiday helped fuel the rebound. Equity markets held onto their gains, while bond investors shifted focus toward upcoming U.S. inflation data. 

Traders are weighing two competing narratives: the risk that Federal Reserve independence is eroded by political pressure, and the rising likelihood of earlier and deeper monetary easing. For now, optimism around stimulus appears to be keeping the dollar supported. 

The Fed is under pressure. Recent data continues to flash “stagflationary” warnings: job creation is slowing, growth is cooling, and inflation remains stubbornly high. The challenge for the central bank is not only economic but increasingly political. Former President Trump escalated his attacks last week, accusing Governor Lisa Cook of misconduct, an episode that ultimately led to her removal. These tensions may prove just as influential as this week’s key data releases: revised Q2 GDP on Thursday and July’s PCE inflation on Friday. 

Powell’s speech in Wyoming placed greater emphasis on labour market weakness than on inflation. Markets initially cheered the dovish tone, with stocks and bonds rallying. But by the weekend, enthusiasm had faded. If Friday’s PCE data shows a renewed inflation surge, investors may question whether Powell’s dovish stance is sustainable. 

The Eurozone economy is showing signs of renewed strength. Business activity accelerated in August, with new orders climbing at the fastest pace in over a year. This suggests momentum is gradually returning after a sluggish first half. 

Inflation is holding close to the ECB’s 2% target, with core readings also steady just above that level. With prices under control and growth stabilising, the central bank is expected to keep rates unchanged for the time being. The narrowing gap between U.S. and Eurozone yields could lend the euro further support, which in turn may provide an indirect boost to GBP/USD.  

The UK’s inflation problem is proving stubborn. July CPI climbed to 3.8%, up from 3.6% the month before, fuelled by higher costs for food, transport, and utilities. The Bank of England now expects inflation to peak at around 4% in September and remain uncomfortably high well into 2026. 

Food prices are a particular concern, with staples like eggs and butter driving food inflation to 4.2%, its highest level in a year and a half. At the same time, household sentiment is weakening. Several major retailers have been downgraded as analysts brace for a squeeze on consumer spending. 

With inflation pressures building and wage growth still firm, the BoE has little room to ease further. The Monetary Policy Committee looks set to hold rates steady, keeping its focus squarely on controlling prices, even at the expense of growth. 

Jackson Hole underscored the Fed’s balancing act: slowing job growth, stubborn inflation, and rising political pressure. Jerome Powell’s reluctance to address deeper structural challenges may calm markets for now but leaves doubts over the Fed’s longer-term direction. 

For currency traders, the focus is squarely on this week’s U.S. GDP and PCE inflation data. Any signs of weaker growth or softer prices could accelerate expectations of Fed rate cuts, reinforcing the case for a weaker dollar and higher GBP/USD in the weeks ahead.