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At the Federal Reserve Bank of Kansas City's Jackson Hole Economic Symposium, Fed Chair Jerome Powell delivered a much-anticipated speech, titled Monetary Policy and Fed's Framework Review.

Powell highlighted the challenges facing the U.S. economy, including significantly higher tariffs and tighter immigration policy, with both affecting supply and demand. Powell noted that, "in this environment, distinguishing cyclical developments from trend or structural developments is difficult. This distinction is difficult because monetary policy can work to stabilize cyclical fluctuations but can do little to alter structural changes".

The Chair's assessment of the labor market was notably more downbeat than his characterization at the July press conferences, noting, "the slowdown is much larger than assessed just a month ago", but balanced that with the unemployment rate remaining "historically low … and broadly stable over the past year".

On tariffs, Powell noted that inflation passthrough has started to materialize on some categories of goods and, "… we expect those effects to accumulate over the coming months". But also noted that both survey and market-based measures of inflation expectations remain well anchored and said it is a reasonable "base case" that tariffs will have a one-time impact on inflation. However, he also acknowledged the risk of a wage-price spiral, though that appears less likely given current labor market conditions.

Lastly on monetary policy, Powell noted "with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance" – highlighting the FOMC's bias towards easing.

Powell's speech also highlighted the Fed's 2025 framework review. The last review was conducted in 2020, where the changes were largely the result of the policy rate being at the effective lower bound for a significant period. The 2025 framework review made three notable changes, including:

• Removing language indicating that the effective lower bound was a defining feature of the economic landscape and instead noted that "monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions".
• Returned to the framework of flexible inflation targeting and eliminated the "makeup" strategy. Back in 2020, the motivation for allowing some inflation overshoot was to account for the fact that inflation had run persistently below the Fed's 2% target over the decade following the Global Financial Crisis. However, the persistent overshoot post-pandemic has led to concerns that it could lead to inflation expectations becoming unanchored.
• The Committee also revised its language on maximum employment. The 2025 framework removed the reference to "shortfalls" and instead states that "the Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability".

Key Implications

Chair Powell struck a more dovish tone in today's speech, sending a clear signal that further policy easing is on the way. While a September cut is looking more likely, it is still not a guarantee and will largely hinge on the August employment and inflation reports. However, markets responded sharply, with the S&P 500 extending earlier gains and is now up 1.5%, while the 2-year Treasury fell 10 basis points to 3.69%. Fed futures have shifted back to pricing in a 90% probability of a September cut – up from yesterday's 70%.

There's a growing divide among policymakers on what's behind the recent slowing in employment. Powell and others acknowledge the role of supply-side factors, including tighter immigration and point to the low and stable unemployment rate as a sign of overall balance. Conversely, Waller and Bowman attribute the cooling to a broader slowing in economic activity. But it's clear that neither camp would disagree that the downside risks have increased since the July FOMC meeting. We would argue that today's market reaction could be a bit overdone. With the Fed's dual mandate coming into tension, Fed officials will remain acutely attuned to risks on both sides, meaning the FOMC's approach to adjusting policy is probably best characterized as a move to a less-restrictive environment as opposed to a return to neutral.

• Accelerating US PCE could weigh on Fed rate cut bets.
• Euro traders eye CPI data from Italy, France and Germany.
• Tokyo CPIs could impact chances of a BoJ hike by year-end.
• Wounded loonie seeks salvation in GDP numbers.

Dollar gains as investors scale back Fed cut bets

The US dollar gained ground this week, benefiting from investors scaling back their Fed rate cut bets.

Following the weak NFP report for July, the disappointing ISM non-manufacturing PMI for the same month, and Trump’s reciprocal tariffs, speculation about faster rate cuts by the Fed heightened, perhaps as the aforementioned blend of developments sparked some recession fears. Investors were fully pricing in a September 25bps rate cut, another one thereafter, and went as far as assigning a 30% chance of a third one before the end of the year.

The CPI data for July corroborated that view, showing little evidence of tariff-induced inflation. However, producer prices accelerated sharply, painting a totally different picture and confirming Fed Chair Powell’s view that the impact of Trump’s tariffs on inflation will start appearing during the summer months. Combined with the strong preliminary S&P Global PMIs for August, this prompted investors to price out several basis points worth of rate cuts. They are now assigning a 70% chance of a September reduction.

After Powell’s speech, focus to turn on GDP and PCE data

The Fed Chief is scheduled to speak today at the Jackson Hole economic symposium, and it seems that the market is bracing for a hawkish outcome. Indeed, not only is the dollar gaining, but Wall Street is in pullback mode.

However, even if he sounds hawkish and does not pre-commit to any action beyond September, market participants may seek further validation from next week’s US data, which includes the second estimate of GDP for Q2 and the PCE inflation data for July, due out on Thursday and Friday, respectively.

The first estimate of GDP came in at 3.0% q/q SAAR and expectations are for confirmation of that. Combined with the 2.3% forecast of the Atlanta Fed GDPNow model, it adds extra credence to the idea that the Fed should not rush into lowering interest rates, despite US President Trump’s pressure and repeated attacks on Chair Powell. That said, it is worth mentioning that the Atalanta Fed GDPNow estimate will be revised on Tuesday, before the GDP data are out.

As for the PCE numbers, the Fed’s favorite inflation metric is the core PCE index, whose correlation coefficient with the core CPI – taking into account the last 10 years – stands at 0.75. Therefore, given that the core CPI accelerated to 3.1% y/y from 2.9%, the risks for the core PCE index may be tilted to the upside. Therefore, more data suggesting sticky inflation could encourage more market participants to price out a second rate cut beyond September for this year.

This is likely to help the US dollar extend its recovery, while equities could drift lower as a slower pace of rate reductions could translate into lower present values for high-growth firms that are valued by discounting projected free cash flows.

Is the ECB done or are more rate cuts needed?

Turning to the Eurozone, the calendar includes the preliminary CPI numbers for August from Italy, France and Germany, set to be released on Friday. At its latest meeting, the ECB kept interest rates unchanged, while President Lagarde appeared more hawkish than expected at the press conference, which combined with the EU-US trade deal, raised speculation of a prolonged pause on interest rates.

Following the better-than-expected preliminary GDP data for Q2, the still-above-target core CPI rate, and the improving flash PMIs for August, investors are pricing in only 10bps worth of rate reductions by the end of the year. This translates into a 45% chance of another quarter-point cut by December. However, the market is not fully pricing in a 25bps cut even in 2026. Investors are just assigning a 72% chance that another cut might be delivered by June next year.

Having all that in mind, should preliminary inflation data from the Eurozone’s largest economies suggest that inflation is not further cooling, there may be no need for additional interest rate reductions should growth-related data continue to point to improvement. Euro traders may assign a smaller probability to another rate cut and the common currency may drift higher.

Tokyo CPIs enter the limelight as BoJ hike chances increase

Yen traders will also have to digest a bunch of Japanese data. During the Asian session on Friday, the Tokyo CPI figures for August will be published, alongside the nation’s unemployment rate, industrial production and retail sales for July.

This week, a former foreign minister who is rumoured to be among candidates for becoming a future prime minister, said that Japan must raise interest rates to strengthen the weak yen that has pushed up inflation and brought pain to households. This pushed the probability of another rate hike by the BoJ before year end higher, currently at 70%. Hence, accelerating Tokyo CPIs could take that probability higher and encourage investors to drive the yen higher, especially if the accompanying data also comes on the bright side.

Soft Canadian GDP to increase likelihood of BoC cut

Canada’s GDP for Q2 is also due to be released as the same time with the US core PCE numbers. The loonie was hurt earlier this week as the softness in Canada’s CPI data bolstered the case for further rate cuts by the BoC. Investors are currently assigning a 33% chance of a quarter-point reduction at the Bank’s upcoming gathering on September 17, with that probability rising to 90% in December. A soft GDP print may solidify the case of another reduction before year-end, thereby allowing some further loonie selling.

Canada’s gross domestic product report next Friday is expected to show zero growth in Q2─a sharp cooling from the 2.2% gain in Q1 this year.

Still, a flat reading in Q2 consistent with Statistics Canada’s advance estimates of monthly output through June is better than feared, given spring saw a surge in U.S. tariffs (and threats) that rattled business and consumer confidence.

These international trade disruptions have significantly impacted the economy. Canadian merchandise export volumes fell an annualized 31% in Q2 alongside a broader drop in U.S. imports as pre-tariff inventory building unwinds. Business investment likely edged down modestly and would have been substantially weaker without a large ($2 billion) one-time import of machinery for offshore oil production in June.

Household demand stays on course

Household spending, however, held steady with consumer spending tracking a similar pace to Q1’s 1.2% increase. A bounce back in home resales and housing starts also signals an increase in residential investment. Total final domestic demand, which strips out volatile swings in trade and inventories, should post a small gain─suggesting underlying momentum is not as weak as the headline implies.

We expect GDP to post a slightly stronger 0.2% month-over-month increase in June than StatsCan’s 0.1% estimate, marking the first increase in three months following small declines in April and May.

Early indicators also point to a rise in output in service producing industries in June. Retail sales rebounded strongly (+1.5%) following a 1.2% drop in May, consistent with our tracking of RBC consumer card transactions that showed spending held up in Q2 despite the sharp drop in consumer confidence. The real estate sector extended its recovery as housing resales improved through the quarter.

Oil production to boost output

The manufacturing sector continues to be among the industries more significantly impacted by international trade disruptions, and uncertainty. We expect output in the sector to be broadly consistent with flat manufacturing sale volumes reported. But oil production likely bounced back after wildfire-related disruptions in Alberta in May.

Trade uncertainty will continue to affect business investment regardless of future tariff decisions. Nevertheless, CUSMA exemptions for most Canadian exports have prevented worst case scenarios, and we anticipate subdued, but positive growth through the remainder of 2025.

Week ahead data watch:

U.S. personal spending in July likely increased by 0.4%, slightly higher than the previous month. Much of this growth came from stronger auto sales. Additionally, retail sales rose by 0.5% in July, following a larger 0.9% increase in June. We also expect personal income to rise from 0.3% in July to 0.5%, reflecting the higher wage growth reported in the July payroll data.

This week's main data highlights were the PMI reports for August. In the euro area, the report showed the manufacturing sector recording growth for the first time since June 2022. The manufacturing PMI crossed the 50-mark in a larger-than-expected rise to 50.5 from 49.8, defying expectations of a decline to 49.5. The rise was due to both France and Germany. At the same time, services PMI declined to 50.7 from 51.0, which was as expected. The positive string of growth surprises thus continues in the euro area, which supports our call that the ECB is done cutting interest rates. We also received data on wage growth for the second quarter of 2025. The indicator of negotiated wages rose to 4.0% y/y in Q2 from 2.5% y/y in Q1, which was heavily affected by base effects, but nevertheless a bit high. Overall, wage growth is trending lower compared to last year.

In the US the PMIs also for August exceeded expectations, with manufacturing rising to 53.3 (consensus: 49.7) from 49.8, while services declined slightly to 55.4 (consensus: 54.2) from 55.7. The manufacturing increase was driven by higher new orders, employment, and output indices, with the output index reaching its highest level in over three years - indicating very strong details overall. However, given the volatility in PMIs since April, caution is warranted in interpreting single-month movements. That said, the August PMI report stands out as more positive compared to the recent downward trends in ISM and weak payroll data.

The UK PMI data came in stronger than expected like in the US and euro area, with the composite index rising to 53.0 from 51.5, driven by a much stronger-than-anticipated performance in the service sector. The August PMIs add to a series of hawkish data, adding to the case for the Bank of England (BoE) to hold rates unchanged in November, though there is plenty of significant incoming data before the November meeting and we continue to expect a cut. July inflation was also to the hawkish side, which surprised to the topside across the board, but the details suggests that it was driven by the volatile air fares component alleviating some concern for the BoE. Headline CPI came in at 3.8% (cons: 3.7%), core at 3.8% (cons: 3.7%) and services at 5.0% (cons: 4.8).

In China, a batch of data for July showed weakness in the economy across the board, which adds to the loss of momentum seen in recent months. Both consumption and housing moved another notch lower, and investments weakened as well. The only bright spot currently is strong exports, but it is paramount for the economy that domestic demand gets on a stronger footing. It is also a high priority for China's leaders, and we expect to see new stimulus soon targeting consumption and housing. See more in China Flash - Further weakening of economy calls for new stimulus, 15 August.

Next week will be light in terms of economic data. The main highlight is the flash August inflation data from Germany, France, Italy, and Spain, which is released ahead of the euro area aggregate. We expect euro area HICP inflation to increase to 2.1% y/y in August from 2.0% y/y in July driven by an increase in energy inflation while core inflation is expected to remain unchanged at 2.3% y/y. In Japan, we receive a batch of data on Friday covering retail sales, unemployment, and Tokyo CPI inflation. US PCE inflation is also due Friday.

Full report in PDF. 

Markets

Fed chair Powell’s long-awaited speech in Jackson Hole highlights that the balance of risks between the Fed’s price stability and maximum employment goals appears to be shifting. With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting the Fed’s policy stance. The Fed is puzzled by the current balance on the labour market which results from a marked slowing in both the supply and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.That’s a strong hint that the Fed is ready to pivot towards to a 25 bps rate cut at the September FOMC meeting. Markets have to repositioning again as latest PPI and PMI numbers argued in favour of a longer hold. The US yield curve bull steepens with yields dropping 8.5 bps (2-yr) to 3.7 bps (30-yr) in a first reaction. Loss of USD interest rate support propels EUR/USD from 1.16 to 1.1670. US equity markets rally up to 1.5%.

Looking forward to next week, European trading will be thin on Monday with UK markets closed for Summer Bank holiday. The Belgian debt agency nevertheless auctions three OLO lines (OLO 97 3% Jun2033, OLO 100 2.85% Oct2034 and OLO 101 3.5% Jun2055). So far, the debt agency raised €35.15bn via syndications and auctions compared to a €47bn OLO funding need. German Ifo Business sentiment will be published as well, but the outcome is normally in line with this week’s PMI release. The German composite PMI improved marginally (50.9 from 50.6) on the back of an improvement in the manufacturing sector (49.9 from 49.1). US eco data are plenty, but second tier, on Tuesday with July durable goods orders, Richmond Fed manufacturing index, consumer confidence and housing prices. Especially the latter two will be watched though could give conflicting signal (for the Fed). One might point in the direction of rising inflation expectations, the other to a further cooling of the US housing market. The US Treasury starts its mid-month refinancing operation the same day with a $69bn 2-yr Note auction. $70bn 5-yr Note and $44bn 7-yr Note sales follow on Wednesday and on Thursday. These shorter tenors draw less market attention than the longer (end-of-month) sales of 10-yr and 30-yr Notes/Bonds. Wednesday risks being uneventful in absence of eco data with Minutes of the July ECB decision the highlight on Thursday. Bloomberg today runs an article that the ECB is increasingly convinced that they can keep interest rates unchanged in September with growth and inflation developing largely in line with June projections. An “insurance” rate cut to cover the downside of the risk balance risks backfiring if associated with speculation about deteriorating prospects and is therefore off the table. Q2 EMU negotiated wage data today also showed an uncomfortable acceleration from 2.5% Y/Y to 4% Y/Y, pointing at sticky services inflation. EMU money markets keep repositioning away from a more dovish ECB scenario, with the probability of another 25 bps before year-end currently only at 36%. Inflation is the focal point on Friday with Germany, France, Spain and Italy reporting August CPI numbers, the ECB publishing its consumer inflation expectations and July US PCE deflators due. The Fed’s preferred inflation measure risks showing stronger inflationary dynamics than the July CPI number given certain components from the July producer prices report (+0.9% M/M; highest since March2022) feeding into PCE (eg 1% M/M increase in Airline passenger services or 5.8% M/M higher portfolio management costs).

News & Views

The German IFO institute today already published its survey on residential construction. Sentiment improved significantly in July (-25.8 to -23.5) as companies turned less skeptical, especially about the future. Their assessment of the current situation also brightened slightly. Head of Ifo Surveys Wohlrabe said that residential construction companies are cautiously hopeful, but that there is still a high level of dissatisfaction in the sector. However, with the share of companies lacking orders at the lowest since August 2022 (still 46.1%) and the cancelation rate easing further, IFO assesses that residential construction is heading in the right direction though it needs more than just political announcements. A sustained improvement is also conditional on how financing costs develop.

Dollar fell sharply after Fed Chair Jerome Powell hinted that the case for rate cuts may soon strengthen. Speaking at Jackson Hole, Powell highlighted Fed’s growing policy trade-off: inflation risks remain tilted upward while downside risks to employment are building. He stressed that the Fed’s framework requires carefully balancing these competing pressures.

Powell observed that policy is already significantly closer to neutral compared to a year ago, with unemployment and other labor measures steady enough to permit a cautious approach.

Importantly, Powell said that with monetary policy already in restrictive territory, the evolving balance of risks “may warrant adjusting our policy stance.” Markets took this as a subtle hint that easing could be on the horizon, accelerating Dollar losses across the board.

Full speech of Fed's Powell here.

Boston Fed President Susan Collins said on Bloomberg TV that while U.S. growth has shown signs of slowing, the "overall economic fundamentals are relatively solid." She argued policymakers cannot wait until all uncertainty clears before acting and must carefully weigh the Fed’s dual mandate.

She emphasized policymakers "cannot wait until all of the uncertainty is behind us," and must instead weigh both sides of the Fed’s mandate.

"If we start to see worsening labor market risks relative to inflation, starting to dial back the restrictiveness would become appropriate," she said.

The dollar index stood at the front foot and hit three-week high on Friday morning, as improved sentiment on Fed policy outlook continued to boost dollar in past few days.

Initial signals that the central bank may opt for more aggressive policy easing after disappointing July labor data, along with strong downward revisions of June and May numbers, were overshadowed by the latest inflation data which pointed to increased inflationary risk and tempered expectations for rate cuts, with significant drop in bets for widely expected September rate cut, contributing to more cautious approach.

All eyes are on today’s speech of Fed Chair Powell in Jackson Hole symposium, with expectations to get more information about Fed’s action in coming months.

Powell is very likely to put priority on inflationary risk against threats from weakening labor market, which would result in more hawkish stance, however, he may not come with many details as there will be release of another labor report before Fed’s September meeting, suggesting that Powell will be very cautious with his comments in Jackson Hole.

This may result in repeating his standard mantra that the central bank remains on track for policy easing, but any decision will be dependent on the latest economic data.

The dollar is so far on track for strong weekly gain which has retraced the biggest part of losses in past two weeks and about to complete weekly bullish engulfing pattern that would add to developing bullish signals.

Technical picture on daily chart has improved, but bulls started to face headwinds from cracked resistance at $98.73 (50% retracement of $100.04/$97.42 bear-leg, reinforced by falling 100DMA) and nearby daily cloud top ($98.88).

Bullish scenario requires break of $98.73/88 barriers that will signal continuation and expose targets at $99.42 (Fibo 76.4%) and $100 psychological / Aug 1 peak).

Broken Fibo 38.2% ($98.42) reinforced by daily Kijun-sen, marks solid support which should ideally hold and keep bulls intact.

Break here and dip through daily Tenkan-sen ($98.07) will be bearish.

Res: 98.73; 98.88; 99.04; 99.42
Sup: 98.42; 98.30; 98.07; 97.61

Retail sales rose 1.5% month-on-month (m/m) in June, just a tad lower than Statistics Canada's 1.6% advanced estimate.

After adjusting for inflation, the volume of retail sales increased 1.5% m/m.

Unlike in previous months, auto sales were not a major swing factor, with sales edging up just 0.2% m/m after a 1.8% decline in May.

Receipts at gas stations and fuel vendors rose 1.8%, following three consecutive declines. In volumes terms, sales grew an even stronger 2.7% m/m, as lower fuel prices weighed on the nominal gain.

Core sales – excluding auto sales and receipts at gas stations – were solid, rising 1.9% m/m in June. Food and beverage stores led the way (+1.2% m/m) with broad-based gains across most categories. Notably, sales at clothing and clothing accessories stores surged 5.1% m/m, while sales at general merchandise stores climbed 1.8% m/m.

The lone laggard category was furniture and home furnishings stores, which slipped 0.8% m/m.

E-commerce sales declined by 1.7% m/m in June.

Statistics Canada's advanced estimate points suggests that sales pulled back in July, falling 0.8% m/m.

Responses to the supplementary questions showed that 27% of retailers reported being affected by trade tensions, down from 32% in May.

Key Implications

Retail sales matched expectations at the headline level but surprised to the upside in core categories. This indicates that auto-driven gains seen in the spring now lost momentum. On a quarterly basis, real retail sales posted a respectable 3.1% annualized gain with June's strength leaving core sales as the main driver of the topline tally.

Consumer spending held up better than we previously expected and we now see real spending tracking 1.2% in the second quarter (quarter-on-quarter, annualized). However, as the advance estimate indicates, momentum is likely to cool in Q3. With employment growth slowing and trade tensions clouding the outlook, there is little for the average Canadian household to get excited about.

Daily Pivots: (S1) 1.1584; (P) 1.1623; (R1) 1.1646; More...

Intraday bias in EUR/USD remains mildly on the downside as fall from 1.1729 is in progress. Deeper decline would be seen towards 1.1390 support as corrective pattern from 1.1829 extends. On the upside, above 1.1662 minor resistance will turn intraday bias neutral again.

In the bigger picture, rise from 0.9534 long term bottom could be correcting the multi-decade downtrend or the start of a long term up trend. In either case, further rise should be seen to 100% projection of 0.9534 to 1.1274 from 1.0176 at 1.1916. This will remain the favored case as long as 1.1604 support holds.