Warsh's Fed leaves markets 'not happy', Dollar's 'path of least resistance' is lower

Matthew Ryan, CFA Ebury

Chair Warsh is clearly determined to break with his Federal Reserve predecessors. He has managed to restrict communications to markets and vowed to curtail them further in the future.

Further, he suggested that he sees Fed rates as playing a less critical role in controlling inflation, and appears to be comfortable with the steady sell off in the long end of the US curve rates, as he expects it to do the job for the Fed. Whatever the theoretical underpinnings of the approach, it is clear that neither the currency nor the bond market is happy with the change.

Attention now shifts to the July payrolls report on Friday. Economists are expecting a rebound from last month's somewhat disappointing numbers, but no change in the overall trend of a modestly-growing labour market.

In light of Fed dovishness, FX intervention in the yen and signs of progress towards a US-Iran peace deal, we see the path of least resistance for the dollar as lower.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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