Jackson Hole Scenarios Shape FX Risk for US Dollar

MUFG's analysts argue that the US Dollar's performance at Jackson Hole will be influenced by the Federal Reserve Chair's speech. According to Derek Halpenny and Abdul-Ahad Lockhart, the event only becomes significant when the Chair delivers a clear policy surprise or commits to future action.

The Bloomberg Dollar Index (BBDXY) has historically moved more than 0.5% on the day following Jackson Hole speeches. Warsh's stance against using forward guidance as a policy tool is seen limiting USD volatility.

The analysts outline three scenarios for Chair Warsh's speech, with limited scope for forward guidance and a lower probability of an outsized USD move. In scenario one, Warsh sticks to his principles, avoiding policy signals and focusing on broader economic themes. This would result in a modestly softer dollar as expectations are unwound.

In scenario two, Warsh offers framework guidance rather than policy guidance, discussing the Fed's reaction function, productivity trends, and inflation tolerance without committing to a September decision. Market reactions in this scenario would remain contained.

Scenario three is the lowest-probability event, where Warsh breaks from his stated approach and sends an explicit signal on the policy path. This could trigger an outsized USD move.