Can Warsh stop the dollar selling at Jackson Hole?
Citi does not expect Federal Reserve Chair Kevin Warsh's remarks at Jackson Hole to reverse the dollar's selling trend, arguing that risks to this view stem more from valuation and positioning than any fundamental case for a hawkish surprise.
Intelligence analysis by Llama
Citi strategists believe that Federal Reserve Chair Kevin Warsh's remarks at Jackson Hole will not reverse the dollar's selling trend, citing valuation and positioning risks over a hawkish surprise. They argue that the risks to their view are less about a hawkish surprise from Warsh and more about positioning, valuation, or the U.S.-Iran conflict.
Imagine you're at a big meeting where people are talking about how to make the economy better. Federal Reserve Chair Kevin Warsh is going to give a speech, and some people think he might say something that will make the dollar go up. But Citi, a big bank, thinks that's unlikely because the risks are more about how people are positioned and how much they're willing to pay for the dollar, rather than what Warsh actually says.
Analysis
Warsh's Remarks at Jackson Hole
Citi strategists believe that Federal Reserve Chair Kevin Warsh's remarks at Jackson Hole will not reverse the dollar's selling trend. They argue that the risks to their view are less about a hawkish surprise from Warsh and more about positioning, valuation, or the U.S.-Iran conflict.
According to Citi, there are three scenarios that could give Warsh incentive to sound hawkish. The first would be insufficient hawkish premium already priced into the curve, but with 10 basis points priced for September, the bank believes there's likely enough premium to satisfy Warsh from a financial conditions standpoint. The second scenario would be a belief that a hawkish surprise is needed to contain the back end of the yield curve. Citi said this isn't shared by its own rates strategists, who 'note a rate hike (at the extreme) is unlikely to reverse the recent rise in term premium.' The third would be data pointing to inflationary reacceleration, but strategists noted data has 'broadly come in softer over recent months.'
Overall, 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 — assuming the Fed holds, the ECB hikes once more, and oil prices normalize gradually — points toward 1.18, factoring in overshoot potential. Risks to that view are less about a hawkish surprise from Warsh and more about positioning, valuation, or the U.S.-Iran conflict, the strategists noted.
They said EUR/USD overvaluation 'is starting to look more stretched,' and with leveraged accounts already short the dollar, some position trimming around Jackson Hole is possible. On the conflict risk, the team said it prefers to hedge via a four-month NOK/SEK call spread rather than build re-escalation into its dollar base case. The one area that could surprise hawkish, in Citi's view, would be any preview of task force results on the balance sheet, though the strategists see little incentive for that, particularly if there's coordination between Treasury Secretary Bessent and Warsh. More likely, they said, any task force previews would center on AI and productivity, which 'should lean dovish/disinflationary.'
Key points
- Citi strategists believe that Federal Reserve Chair Kevin Warsh's remarks at Jackson Hole will not reverse the dollar's selling trend.
- The risks to Citi's view are less about a hawkish surprise from Warsh and more about positioning, valuation, or the U.S.-Iran conflict.
- 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.
- Risks to that view are less about a hawkish surprise from Warsh and more about positioning, valuation, or the U.S.-Iran conflict.
If Warsh's remarks at Jackson Hole are dovish, it could lead to a decrease in the dollar's value, which could be beneficial for the economy. Additionally, if the task force results on the balance sheet are dovish, it could also lead to a decrease in the dollar's value.
If Warsh's remarks at Jackson Hole are hawkish, it could lead to an increase in the dollar's value, which could be detrimental to the economy. Additionally, if the U.S.-Iran conflict escalates, it could also lead to an increase in the dollar's value.
