Highly expected Fed chair's speech is set to shake markets

On Friday, European markets are expected to open higher following cautious gains in Asian shares. Global attention is focused on the Jackson Hole economic symposium, at which US Federal Reserve Chairman Jerome Powell is scheduled to speak.

Traders around the world will be tuning in to Powell's speech today, looking for clues regarding the pace and trajectory of the central bank's monetary policy tightening efforts.

Many analysts anticipate the chairman of the Fed will adopt a hawkish tone and reiterate that the Fed is committed to dragging inflation back towards its target later in time, even though the market may also wait for a dovish pivot once price increases are under control. 

To snuff out inflation, Powell is expected to emphasize that the central bank will use all the firepower at its disposal, including interest rate hikes. Additionally, he is likely to point out that it will likely hold them there after the Fed raises rates, contrary to expectations that it will begin cutting rates next year.

It is also expected that Powell will not provide any substantive clues to resolve the market debate over whether the central bank will raise rates by a half point or by three-quarters of a point at its next policy meeting on September 21 as well. Instead, Powell will likely reiterate that the Federal Reserve is highly dependent on incoming economic data in its decision. Besides the September Federal Reserve meeting, another major employment report is scheduled for next Friday, and the August consumer price index is scheduled for September 13.

There has been some encouragement in the latest data on US inflation, suggesting that headline inflation may have peaked in June. However, the Federal Reserve still has plenty of time to decide: inflation is still extremely high, there are still price pressures on the way, and commodity prices remain uncertain amid persistent geopolitical tensions.

According to the futures market, there is a strong chance at the September Fed meeting that a three-quarter point hike - equivalent to 0.75 per cent - will take place. During June and July this year, the central bank raised interest rates by 0.75 percentage points. There is now a 60% chance that the Fed will raise rates by 75 basis points in September, based on interest rate futures. Currently, the Fed funds rate ranges from 2.25% to 2.5%, and it targets a rate of 3.50% to 3.75% by the first quarter of next year as the end rate or terminal rate.

On Friday, the dollar index rose slightly, staying close to a nearly 20-year high. Robust US economic data also boosted the greenback, giving the Federal Reserve more room to raise interest rates. Dollar index futures remained flat on Friday.

On the European front, we will receive data on German consumer sentiment for September on Friday and data on French and Italian consumer confidence for August.

It is expected that the UK's energy regulator, Ofgem, will announce the subsequent increase in its cap on energy prices on Friday, which offers critical insights into the nation's rapidly escalating cost of living crisis and the outlook for inflation in the United Kingdom.