Warsh's Hawkish Tone Dampens Dollar Debasement Trade

Fed Chairman Kevin Warsh's recent speech at Jackson Hole has sparked a shift in market expectations for an interest rate hike, boosting traders' perceived odds to 60%. This hawkish rhetoric took the wind out of the US dollar debasement trade that had been boosting assets like gold and Bitcoin throughout August.

The FOMC Chairman confessed that if inflation doesn't abate soon, 'the central bank would have work to do', and he'd be hard-pressed to describe broad financial conditions as restrictive. This statement led traders to reprice their expectations for the September FOMC meeting, making an interest rate hike more likely.

Gold has pulled back 6% from last week's high near $4700, testing the 38.2% Fibonacci retracement of the summer rally at $4410. A break below this level would expose support at $4320 and $4230, while a bounce could start to unwind last week's drop.