US Dollar: Warsh speech shapes Dollar and Treasuries – BNY

BNY’s Geoff Yu emphasizes that Kevin Warsh’s first Jackson Hole appearance will dominate market focus, with July PCE data serving as a lead indicator for U.S. rates and Dollar fluctuations. The report highlights long-end Treasury volatility, concerns over buybacks, and term premium, while noting Canada’s GDP is unlikely to influence the broader North American economic outlook.

Markets anticipate Warsh’s first Jackson Hole speech as Fed Chair, with the symposium’s theme of financial innovation having little direct relevance to recent market instability. Investors are keen to understand how the Fed will respond to Treasury actions, particularly in the long-end bond market. July’s Personal Consumption Expenditures (PCE) Price Index release is the focal point for the week, with core PCE expected to remain steady at 3.3% year-over-year.

However, the primary emphasis will be on Warsh’s speech on Friday at 10 a.m. ET. A weaker PCE print would reinforce expectations of a pause in front-end hawkish rate adjustments, while any deviation from the broader policy narrative could significantly impact rates. The key question for rates revolves around Warsh’s stance on the Treasury’s buyback initiative and its implications for the yield curve.

Any comments on the balance sheet, duration supply, or term premium could cause more substantial movements in long-end bond yields than the data itself. Despite Warsh’s typically measured approach, markets remain cautious. Volatile markets continue to push long-end bond yields higher across major economies, including Japan and South Korea, as regional factors increasingly dominate.

Meanwhile, GBP/USD maintains a negative bias around the mid-1.3600s, while the US Dollar gains ground due to uncertainty surrounding potential U.S. sanctions on Iran, impacting risk-sensitive currencies like the British Pound. EUR/USD trades below 1.1700, struggling as the US Dollar attempts a modest recovery following last week’s Treasury buyback plan-induced sell-off.

Markets remain uneasy over the possibility of economic sanctions on Iran, with details expected to be disclosed later in the day. Gold nears a three-month high near $4,650, benefiting from persistent US Dollar weakness following the Treasury’s increased liquidity support buyback operations in the 10-year to 30-year sectors, raising the maximum to $4 billion from $2 billion, effective September 9.