US Dollar: Warsh boosts policy credibility – OCBC

OCBC FX Strategist Sim Moh Siong and Christopher Wong note that Fed Chair Warsh’s Jackson Hole speech eased debasement concerns and supported the Dollar, with Gold lower and the US yield curve flatter. They say structural worries about Fed credibility have diminished, shifting focus back to US cyclical data ahead of the September FOMC, where markets now price modest tightening but OCBC still expects no hike.

Fed stance keeps Dollar supported

"Debasement concerns faded following Fed Chair Warsh's Jackson Hole speech, with the USD strengthening, gold falling and the US yield curve flattening. Despite recent improvements in inflation data, Warsh stressed that inflation remains too high and remains the Fed's primary concern. He reaffirmed the Fed's commitment to achieving its 2% PCE inflation target and emphasised that short-term interest rates remain the Fed's primary policy tool for fulfilling its dual mandate."

"The FX market's recent focus on structural USD headwinds, driven by policy uncertainty surrounding the Treasury's surprise EUR/JPY intervention and expanded buyback announcement, had challenged our modestly bullish USD view. However, Warsh's Jackson Hole speech has reduced concerns that Fed credibility could become a lasting drag on the USD."

"Markets now price around 15bp of tightening for the September FOMC meeting, up from just 8bp before Warsh's speech. While Warsh's remarks suggest a September rate hike is possible if August CPI surprises on the upside, our base case remains that the Fed stays on hold. Nevertheless, a resilient labour market, sticky inflation and the Fed's determination to preserve its inflation-fighting credibility should maintain a hawkish policy bias and keep the USD supported."

"Asian FX may start the week on a softer footing after the USD rebounded following Warsh’s Jackson Hole remarks. While the speech is not a pre-commitment to a Sep hike, it reinforced the Fed’s inflation-fighting credibility and kept further tightening in play if inflation fails to ease meaningfully. A firmer USD can be a headwind for Asian FX, but not sufficient to erase differentiation across the region."

"USD dips may also prove more restrained for now, with USD bears likely needing softer US data to rebuild conviction. Focus turns to incoming US labour and inflation data ahead of the Sept FOMC."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)