US Dollar: Jackson Hole scenarios shape FX risk – MUFG

MUFG’s Derek Halpenny and Abdul-Ahad Lockhart argue that Jackson Hole only becomes a significant FX event for the Dollar when the Federal Reserve Chair delivers a clear policy surprise or commits to future action. They outline three scenarios for Chair Warsh’s speech, suggesting limited scope for forward guidance and a lower probability of an outsized USD move.

Warsh stance seen limiting USD volatility

"Jackson Hole has a reputation for creating headlines, but history suggests it only becomes a market FX event under specific conditions. Looking back as far as Bernanke's tenure and analysing episodes where the Bloomberg Dollar Index (BBDXY) moved more than 0.5% on the day, three common themes emerge."

"The key difference is that Warsh has repeatedly argued against using forward guidance as a policy tool. He has made clear that he does not intend to pre-commit markets to future policy decisions. In theory, that should significantly reduce the potential for a Jackson Hole surprise."

“Scenario 1: Warsh sticks to his principles. He avoids sending a policy signal and instead focuses on broader economic themes. This would resemble episodes such as 2017, when markets anticipated a policy message and received very little new information. In that case, the most likely outcome would be a modestly softer dollar as expectations are unwound.”

"Scenario 2: He offers framework guidance rather than policy guidance. Warsh could discuss the Fed's reaction function, productivity trends, inflation tolerance without committing to a September decision. This appears to be the consensus expectation. Market reactions in this scenario would probably remain contained."

"Scenario 3: He breaks from his stated approach. This is the lowest-probability event. Any explicit signal on the policy path, whether hawkish or dovish, would represent a genuine surprise and could trigger an outsized USD move seen in 2022 or 2024."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)