Warsh Delivers for Dollar Bulls

The US Dollar is on watch this week after a strong rally on Friday in response to hawkish remarks from Fed chair Warsh at the Jackson Hole Symposium. There was a great deal of anticipation ahead of the meeting over whether Warsh would look to clarify the Fed’s intentions following the somewhat confusing post-FOMC press conference he gave in July. There was also a lot of conversation around the credibility of the Fed under Warsh given his prior refusal to commit to forward guidance and his strong criticism of forward guidance as a tool for central banks. With this in mind, traders were perhaps concerned that Warsh would deliver another lacklustre event.

Fed Hike Expectations Soar

However, USD ultimately soared over the US session as Warsh came out firmly on the hawkish side and warned that further rate hikes were likely given the moves in inflation. Warsh said that the Fed didn’t feel that current policy was restrictive and now was it particularly encouraged by recent inflation readings. Market pricing for a September hike has bow jumped from around 35% prior to Warsh’s comments to above 60% currently. Focus now will be on incoming inflation and employment data ahead of that meeting where, barring any heavy downside surprises, USD looks likely to continue rising as traders align with Warsh’s hawkish signalling.

Technical Views

DXY

The sell off in the index has stalled for now with price breaking firmly back above the 99.15 level. The next test for bulls is the 100.18 level and the retest of the broken bear channel lows. Bulls need to breach that zone to alleviate downside risks and a resumption of the push lower, targeting 97.97 thereafter.