Federal Reserve official Kevin Warsh’s upcoming remarks at the Jackson Hole economic symposium are unlikely to curb the recent dollar selling trend, according to Citi’s fixed-income strategists.
Citi does not expect Warsh’s speech—scheduled for later this week—to reverse the current market dynamics, even if he adopts a hawkish tone. The bank’s strategists noted that a rate hike at the extreme end of the policy spectrum would "hardly reverse the recent rise in the term premium," which has already priced in a 10-basis-point hawkish premium for September.
Recent economic data has "generally come in softer over the past few months," reducing the likelihood of an inflation surprise that could justify a more aggressive Fed stance. Citi has adjusted its currency outlook, shifting from neutral to bearish on the dollar ahead of the symposium.
Warsh, who serves on the Federal Open Market Committee, has indicated his Jackson Hole speech could take one of two approaches: either a traditional preparation for upcoming policy meetings or a broader discussion of structural challenges facing policymakers. Citi’s strategists do not anticipate a hawkish surprise sufficient to alter the trajectory of the dollar’s decline.
The bank’s real-rate model targets the EUR/USD pair at 1.18, factoring in expectations that the Fed will hold rates steady while the European Central Bank delivers one final hike. The model also assumes a gradual normalization of oil prices and the potential for policy overshooting.
Any previews from the Fed’s balance sheet working group are expected to focus on artificial intelligence and productivity, themes Citi suggests "should lean toward the dovish/disinflationary side," particularly if coordinated with remarks from Treasury Secretary Bessent.
