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Dollar steadies after Warsh Jackson Hole speech eases debasement worries

Markets now price about 15bp of tightening for the September FOMC, up from roughly 8bp before the speech, while OCBC expects the Fed to stay on hold.

Reported · Written up by our desk · Major Pairs

OCBC FX strategists Sim Moh Siong and Christopher Wong said Fed Chair Warsh’s Jackson Hole speech helped ease “debasement” concerns, strengthening the US dollar. They pointed to gold falling and the US yield curve flattening after the remarks.

They noted Warsh emphasized that inflation remains too high and reiterated the Fed’s commitment to its 2% PCE inflation target, with short term interest rates positioned as the Fed’s primary policy tool. OCBC said the earlier focus on structural USD headwinds has faded following the speech.

OCBC added that markets have increased expectations for the September FOMC, pricing around 15bp of tightening versus about 8bp previously. Still, OCBC’s base case is no hike, though it expects a hawkish policy bias supported by a resilient labor market and sticky inflation.

Looking ahead, OCBC said Asian FX could start softer as the dollar rebounds, but Warsh’s comments are also seen as keeping further tightening in play if inflation fails to ease. The firm said conviction for USD bears would likely require softer US data as attention turns to upcoming labor and inflation releases before the September meeting.

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