Warsh's Speech Won't Reverse Dollar's Selling Trend: Citi
Citi's strategists do not expect Federal Reserve Chair Kevin Warsh's remarks at Jackson Hole to reverse the dollar's selling trend. The bank believes that risks to this view stem more from valuation and positioning than any fundamental case for a hawkish surprise.
The strategists 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, or data pointing to inflationary reacceleration. However, none of these scenarios currently apply.
Citi remains bearish on the dollar heading into Jackson Hole, having flipped from neutral to bearish in its latest FX forecast update. The bank's real rates model for EUR/USD points toward 1.18, factoring in overshoot potential.