US Dollar: Warsh speech keeps rate hike debate open – Commerzbank

Commerzbank’s Thu Lan Nguyen notes that Kevin Warsh’s Jackson Hole speech boosted the US Dollar by signalling openness to tighter monetary policy and a possible September rate hike. However, she stresses that upcoming US labour market and inflation data, as well as developments in the Iran war, could still alter expectations, so a cautious stance on Dollar strength is warranted.

Fed path still highly data dependent

"Kevin Warsh delivered. In his highly anticipated speech at Jackson Hole, he sent the signals the market had been hoping for regarding a potentially imminent tightening of monetary policy, thereby dispelling doubts that he might be fundamentally opposed to raising interest rates, possibly for political reasons. Unsurprisingly, the US dollar benefited significantly."

"The catch is that while a rate hike in September is now seen as considerably more likely, it is by no means a done deal. For that reason, I would be cautious about jumping on the USD euphoria too quickly."

"This week's US labour market report is the first major item on the agenda. New inflation figures will follow next week. The labour market in particular has recently sent mixed signals. After proving remarkably resilient for an extended period, the July employment report, released earlier this month, was clearly disappointing. At least for August, analysts surveyed by Bloomberg expect a stronger outcome. Such a result would tend to support expectations of a rate hike and, by extension, the dollar. However, another disappointing payrolls figure could also trigger a significant correction."

"On the other hand, the latest data have hardly been a cause for alarm. Consumer prices most recently rose only moderately. If that trend continues, it could provide FOMC members with a reason to remain patient and wait a little longer before taking action."

"After all, it is worth remembering that although US inflation has been above the central bank's target for several years and has accelerated further since the beginning of the year, the Fed, even before Warsh, has so far refrained from raising interest rates. Meanwhile, at the last meeting only three out of twelve FOMC members voted in favour of tightening policy, so there was certainly no sign of a close vote."

"Has the situation changed dramatically since that meeting? Not really. Of course, the data releases still to come as well as the newest developments in the Iran war could alter that assessment."

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