US Dollar: Jackson Hole scenarios shape FX risk – MUFG

MUFG’s Derek Halpenny and Abdul-Ahad Lockhart argue that Jackson Hole only becomes a significant FX event for the Dollar when the Federal Reserve Chair delivers a clear policy surprise or commits to future action. They outline three scenarios for Chair Warsh’s speech, suggesting limited scope for forward guidance and a lower probability of an outsized USD move.

Warsh stance seen limiting USD volatility

"Jackson Hole has a reputation for creating headlines, but history suggests it only becomes a market FX event under specific conditions. Looking back as far as Bernanke's tenure and analysing episodes where the Bloomberg Dollar Index (BBDXY) moved more than 0.5% on the day, three common themes emerge."

"The key difference is that Warsh has repeatedly argued against using forward guidance as a policy tool. He has made clear that he does not intend to pre-commit markets to future policy decisions. In theory, that should significantly reduce the potential for a Jackson Hole surprise."

“Scenario 1: Warsh sticks to his principles. He avoids sending a policy signal and instead focuses on broader economic themes. This would resemble episodes such as 2017, when markets anticipated a policy message and received very little new information. In that case, the most likely outcome would be a modestly softer dollar as expectations are unwound.”

"Scenario 2: He offers framework guidance rather than policy guidance. Warsh could discuss the Fed's reaction function, productivity trends, inflation tolerance without committing to a September decision. This appears to be the consensus expectation. Market reactions in this scenario would probably remain contained."

"Scenario 3: He breaks from his stated approach. This is the lowest-probability event. Any explicit signal on the policy path, whether hawkish or dovish, would represent a genuine surprise and could trigger an outsized USD move seen in 2022 or 2024."