FX markets brace for Warsh at Jackson Hole

Market overview

FX markets are trading cautiously this morning as investors prepare for Kevin Warsh’s first Jackson Hole address as Federal Reserve Chair. The dollar is holding close to a one-week high, while sterling and the euro have both eased against the greenback as traders avoid taking large positions before today’s keynote. Warsh’s comments on inflation, interest rates and the Fed’s policy direction could set the tone across currency markets heading into September. Beyond the US, the growing divergence between Bank of England and ECB expectations is keeping GBP/EUR contained, with neither side yet providing enough conviction for a sustained break from its recent range.

USD: Warsh takes centre stage

The dollar enters today’s Jackson Hole speech on firmer footing, with markets looking for greater clarity after Warsh’s previous comments left questions around how the Fed intends to tackle persistent inflation.

Investors will be particularly sensitive to whether he reinforces the case for tighter policy or takes a more balanced approach to the growth and inflation outlook. A hawkish message could push US yields and the dollar higher, while any suggestion that the Fed is comfortable remaining patient could unwind some of the dollar’s recent gains. With the September FOMC meeting now less than three weeks away, today’s speech has the potential to materially shift US rate expectations.

GBP: Scope for rate expectations to rebuild

Sterling remains caught between relatively resilient domestic fundamentals and continued concerns surrounding the UK’s fiscal position. Stronger economic activity would help government finances through improved tax revenues, potentially reducing some of the risk premium attached to the pound.

More immediately, attention is turning towards the Bank of England’s September meeting. Markets currently attach only around a 10% probability to a rate increase, although investors remain reluctant to completely rule out a 25bp move before year-end.

That leaves room for UK rates to reprice if August data prove stronger than expected or MPC communication becomes more hawkish. Such a shift could provide renewed support for sterling, particularly against the euro.

EUR: ECB expectations support the single currency

The euro continues to draw support from expectations that the ECB will tighten policy next month, creating a clear contrast with the more cautious pricing surrounding the Bank of England.

That divergence has helped keep GBP/EUR broadly locked around the 1.1650 to 1.1700 area in recent weeks. Without a meaningful change in expectations from either central bank, there appears little immediate reason for the pair to establish a strong directional trend.

A hawkish BoE hold alongside an ECB hike could nevertheless favour sterling if markets begin bringing expectations for a UK move later in the year forward.

Looking ahead

• Kevin Warsh at Jackson Hole: Today’s 3:00pm UK speech is the key event, with inflation and the Fed’s policy outlook firmly in focus.

• USD: A hawkish Warsh could reinforce recent dollar strength, while a softer message could trigger profit-taking.

• UK data: August releases will help determine whether markets rebuild expectations for a BoE hike before year-end.

• ECB: A September hike is largely expected, placing greater emphasis on guidance around the path thereafter.

• GBP/EUR: The 1.1650 to 1.1700 region remains the key near-term range, with central-bank expectations likely to determine the next break.