US Dollar: Jackson Hole volatility over credibility – TD Securities

TD Securities strategists anticipate that Kevin Warsh's Jackson Hole speech will concentrate on structural themes like productivity, AI-driven growth, and Federal Reserve regime change. They anticipate that US Dollar (USD) price movements will be influenced more by volatility and perceptions of inflation credibility rather than new forward guidance.

USD risks are slightly tilted downward. A hint of hawkishness regarding inflation credibility might only provide limited support for the greenback. Conversely, a lack of discussion on inflation credibility could have a more significant impact on the dollar. Warsh's speech is likely to center on broader structural issues such as productivity, AI-fueled expansion, supply-side dynamics, and long-term institutional reforms within the Fed.

In the FX realm, the most probable outcome is that Jackson Hole produces more volatility than a clear trend. A speech focused on structural economic issues and Fed regime change might leave markets searching for policy cues that are not present. In such a situation, the dollar could have difficulty establishing a consistent direction unless Warsh provides a clear statement on inflation credibility.

However, the imbalance may be modestly USD-negative. The main concern for markets is the absence of a hawkish reaffirmation of the Fed's inflation mandate, particularly following recent Warsh speeches that led investors to price out further Fed hikes, despite ongoing worries about elevated inflation. Any attempt by Warsh to clarify inflation credibility will only provide modest support for the dollar.

In contrast, failing to address concerns around the credibility of the Fed's inflation-targeting framework could continue to weigh heavily on the USD.