US Dollar: Jackson Hole keeps hike risk alive – MUFG

MUFG’s Derek Halpenny notes the US Dollar has gained modestly after Fed Chair Warsh’s Jackson Hole speech, with US Dollar Index (DXY) up around 0.3% since Friday’s open and 2‑year Treasury yields sharply higher. Warsh’s emphasis on inflation not falling at sufficient speed shifts risks toward a hike, but the FOMC’s recent caution and upcoming NFP and CPI data could still justify holding rates, limiting aggressive Dollar buying.

Fed rhetoric and data-dependent risks

"The US dollar advanced 0.5% on Friday (DXY basis) in response to the speech by Fed Chair Warsh at Jackson Hole but some of that move retraced yesterday and the dollar’s gain since Friday’s open is now a more modest 0.3% with front-end yields across G10 also rising, in part on a renewed increase in energy prices following the renewed escalation in hostilities between the US and Iran."

"The more modest US dollar reaction makes sense from a number of perspectives. Firstly, as laid out below, every G10 central bank is meeting this month and some will be hiking, some may surprise and hike and some will remain on hold. But if energy prices remain elevated and/or grind higher the tone of rhetoric from most central bankers is likely to be hawkish and this could well be curtailing the appetite to buy the US dollar at this stage"

"Secondly, while Fed Chair Warsh was hawkish on Friday in Jackson Hole the gist of his speech was similar to his previous speeches – he talked tough on inflation and was clear that if inflation did not decline at “sufficient speed” that the Fed had “work to do”."

"But Warsh and the FOMC haven’t hiked at the previous two meetings under the leadership of Warsh and it remains the case that the Board of Governors have a more dovish tendency than the regional Presidents."

"So the decision remains a close call ahead of NFP and CPI and hence with front-end yields moving higher globally and with an elevated degree of uncertainty given the busy month of central bank meetings, the dollar buying has been curtailed."