Warsh's Jackson Hole Speech Won't Save the Dollar

Citi analysts do not expect Federal Reserve Chair Kevin Warsh's speech at Jackson Hole to reverse the dollar's selling trend. The bank believes risks to this view stem more from valuation and positioning rather than any fundamental case for a hawkish surprise.

Warsh outlined several possible directions for his speech, including a traditional setup speech for upcoming meetings or one framing the 'big questions' facing policymakers. Citi strategists expect remarks on medium-term themes that the FOMC is currently grappling with.

The bank outlined three scenarios that could give Warsh incentive to sound hawkish: insufficient hawkish premium already priced into the curve, a belief that a hawkish surprise is needed to contain the back end of the yield curve, and data pointing to inflationary reacceleration. Citi said none of these scenarios currently apply.

The bank remains bearish on the dollar heading into Jackson Hole, having flipped from neutral to bearish in its latest FX forecast update. Its real rates model for EUR/USD points toward 1.18, factoring in overshoot potential.