FX Daily: Keeping an eye on the long end
At a Glance
The desk believes that the upcoming speech by Fed Chair Kevin Warsh at the Jackson Hole symposium could provide key insights into the direction of long-dated US Treasuries, influencing FX markets significantly. With low volatility affecting FX pairs like EUR/USD, GBP/USD, and USD/JPY, market participants are particularly focused on any signals Warsh may give regarding monetary policy. Per the full note, if Warsh adopts a hawkish tone, it might strengthen the dollar against low-yielding currencies like CHF and JPY. Conversely, any dovish sentiment emphasizing financial innovation over policy could see carry currencies underperform, especially if Treasury yields rise sharply, potentially revisiting the 5.30% mark for 30-year bonds.
Key Takeaways
- 01Warsh's Jackson Hole speech is critical for assessing Fed monetary policy direction.
- 02Expect volatility in USD/JPY, CHF, and other carry trades based on Warsh’s tone.
- 03Current FX market signals minimal follow-through from last week’s dollar debasement.
- 04Mixed targets from firms illustrate prevailing uncertainty in FX markets.
Full Analysis
What the desk is arguing
The desk observes that Warsh's address at Jackson Hole is pivotal for understanding the Fed's monetary stance, particularly its impact on long-term Treasury yields. There is uncertainty surrounding whether he will address policy directly, given the symposium's focus on financial innovation. If he does opt to clarify the Fed's position, this could have immediate repercussions for the dollar, especially against currencies with lower yields such as JPY and CHF.
Supporting this view is the current market expectation of a slight shift in pricing for a September rate hike, now hovering around 8-9 basis points. FX traders are thus hedging positions with a USD/JPY straddle suggesting a narrow range of 35 pips for today. If Treasury yields surge, as anticipated, it may disrupt carry trades and provoke volatility across lower yielding currencies.
Where it sits in our coverage
Current consensus for EUR/USD is 1.1700 with a range of 1.1200–1.2000. Specific forecasts from aligned firms include: - ing: 1.1700 (Mar26) - morganstanley: 1.2000 (Mar26) - hsbc: 1.1700 (Mar26)
This position indicates a slightly bullish sentiment, particularly given our firm’s own target is at the upper bound of the market range. Other firms have been more conservative, suggesting a wide spread of expectations, further emphasizing the uncertainty among traders moving into the symposium.
How other firms see it
General consensus among firms showcases a divide: while ing, morganstanley, and hsbc exhibit a bullish outlook, firms such as nomura are positioning for bearish trends with lower targets for both EUR/USD and other pairs, reflecting mixed sentiments across the board.
Additionally, pay attention to the close relationship between USD/JPY and the Bank of Japan's policy, as any hawkish cues from Warsh could create ripples across both pairs due to their interconnectedness in global monetary trends.
Market Implications
Focus on the USD/JPY reaction today, especially if Treasury yields move sharply. A level of 5.30% on 30-year bonds may drive a stronger dollar narrative. Watch for any policy statements from Warsh that could reshape expectations ahead of upcoming Fed communications.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Morgan Stanley | Bullish | 1.2150 |
UOB | Bullish | 1.1800 |
ING | Bullish | 1.1700 |
From the original
Articles FX Daily: Keeping an eye on the long end Published 07:45 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download At the end of a quiet week in FX, the highlight today is a speech from Fed Chair Kevin Warsh at the Jackson Hole symposium. Given that
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4 itemsJackson Hole preview: Fed Chair Warsh likely to skip September and December rate signals
The desk anticipates that Fed Chair Warsh's upcoming speech at Jackson Hole will prioritize longer-term strategic visions over immediate monetary policy guidance. Per the full note from InvestingLive, this suggests traders may not receive the explicit rate signals they hoped for regarding September or December. Current market dynamics, which remain sensitive to incoming economic data rather than central bank rhetoric, reinforce this view. Despite some expectations for directional repricing, the absence of near-term guidance as outlined by Morgan Stanley implies that the focus will shift to Warsh's broader economic philosophy and policies.
A New Era
The desk believes the anticipated appointment of Kevin Warsh as Fed chair could mark a watershed moment for U.S. monetary policy, potentially driving further strength in the U.S. dollar while exerting downward pressure on the euro. Per the full note from J.P. Morgan, expectations surrounding Warsh's leadership are tied to a hawkish tilt given recent macro developments, including rising inflation and robust economic data. This perspective aligns with J.P. Morgan's bearish forecast for EUR/USD, projecting a decline to 1.14 by December 2026 amidst a shift in market sentiment. As we navigate through the current landscape, the absence of high-impact events in the upcoming calendar suggests potential stability ahead, but vigilance remains essential.