Jackson Hole Preview: All eyes on Powell and Gold

The bullish drive in markets has seen a swift recovery from the meltdown seen two weeks ago but indecision has reappeared. The past two weeks have seen buyers dominating risk appetite as stocks and risk-driven currencies have mostly managed to close the gap and recover the levels seen at the end of July. But this means that they are back to where they were before, unclear on where to go, how the latest data will perform, and when the Federal Reserve will start cutting rates.

This week is going to be key for that. Not only will the FOMC release its meeting minutes on Wednesday, but the central bank will gather at its annual symposium in Jackson Hole, where all matters inflation and rates will be discussed. Until then, there is likely to be a lack of direction in markets. We do have the Democratic National convention taking place, but it’s unlikely that it will provide much volatility. After all, politics is not a now problem.

Fed Chairman Jerome Powell is expected to set the tone for a September interest rate cut after the bank kept rates unchanged for the eighth consecutive time in July. Markets had been hoping that softer CPI readings could entice the central bank to cut rates by 25 basis points at the previous meeting. The higher-than-expected unemployment rate reading a few days later led to a market meltdown as investors became concerned that Jerome and his team had made the wrong decision by keeping rates unchanged. This led to calls for an immediate out-of-cycle cut, which was highly unlikely to happen, but it also called for a 50-basis point cut in September, although those odds have slowly dissipated, aided by the July CPI reading coming in mostly as anticipated.

The FOMC meeting minutes will give further insight into the thought process behind the decision to keep rates unchanged, likely based on persistent inflation in some areas of the economy. But if they show that the decision was a close and that several members were willing to start cutting in July, we could see a further strengthening of risk appetite as it sets up the playing field for a cut in September. Further confirmation of this from Powell of Friday would likely see further strengthening in global stocks, accompanied by a softening dollar and US yields.

The question now is how big will the rate cut be? It seems unlikely that Powell will easily entertain the idea of a 50-basis point cut, likely playing down the need for such a big move. That said, if he does play into the expectations of a larger cut in September then we could see the volatility intensify, as it would allude to greater concerns about economic recession by the central bank.

In this case, the momentum could be slightly choppy in markets. The initial reaction could be risk-on, but economic concerns could later creep in, limiting the upside in stocks. One asset that could benefit from this scenario would be gold (XAU/USD) as lower rates and fears of recession would both boost the precious metal, which saw a new all-time high on Friday.

XAU/USD surpassed the previous high at $2,484 in a move that invalidated the possible triple-top pattern that weas threatening the continuation of the bullish momentum. The commodity is trading slightly softer on Monday morning, which is not uncommon after reaching a new high. This bearishness could continue in the coming days as traders find a comfortable level, before the possible volatility later on this week.

Gold (XAU/USD) daily chart

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