Dollar Selling Trend Unlikely to Reverse at Jackson Hole

Citi analysts have weighed in on what Federal Reserve Chair Kevin Warsh may say at Jackson Hole, suggesting it won't be enough to reverse the dollar's selling trend. The bank doesn't expect a hawkish surprise from Warsh, citing risks to this view stemming from valuation and positioning rather than any fundamental case for a rate hike.

Warsh is set to speak at Jackson Hole on medium-term themes facing policymakers, according to Citi strategists who outlined three scenarios that could give him incentive to sound hawkish. However, none of these apply in their current view, with insufficient premium already priced into the curve and no data pointing to inflationary reacceleration.

The bank remains bearish on the dollar heading into Jackson Hole, having flipped from neutral to bearish in its latest FX forecast update. Citi's real rates model points toward 1.18, assuming the Fed holds, the ECB hikes once more, and oil prices normalize gradually, factoring in overshoot potential.

Risks to this view are less about a hawkish surprise from Warsh and more about positioning, valuation, or the U.S.-Iran conflict, according to Citi strategists. They note that EUR/USD overvaluation is 'starting to look more stretched', with leveraged accounts already short the dollar.