What’s next for the USD after Jackson Hole?
At a Glance
The desk anticipates further depreciation of the USD following Fed Chair Powell's remarks at Jackson Hole, which highlighted a potential divergence in monetary policy between the Federal Reserve and other major central banks. Per the full note from MUFG EMEA, this divergence could lead to a weaker USD as markets adjust to a more dovish Fed stance compared to tightening elsewhere. The desk's view is supported by the current positioning in the FX market, where traders are increasingly betting on a prolonged period of low rates from the Fed. With no high-impact events on the calendar in the next month, this trend may continue to unfold without immediate catalysts for reversal.
Key Takeaways
- 01Diverging monetary policy could weaken the USD further.
- 02Market positioning is crucial as central banks balance their trajectories.
- 03Powell's speech may reshape expectations for future Fed actions.
Full Analysis
What the desk is arguing
MUFG analysts posit that ongoing divergence in monetary policies could place downward pressure on the USD. With Fed policy potentially remaining tighter than that of other major central banks, any indication of reduced tightening could escalate this effect, leading investors to recalibrate their positioning in the FX markets.
As Powell's rhetoric at Jackson Hole dives deeper into economic uncertainties, the broader narrative may position the USD at risk of depreciation. The implication here is that should other central banks signal an inclination to raise rates while the Fed holds its course, the resultant supply-demand dynamics may further exacerbate a decline in USD valuation.
Where it sits in our coverage
Our current consensus target for the USD is 1.075, indicating a modest bearish outlook aligned with MUFG's perspective on USD weakness. While our view aligns with MUFG regarding market sentiment, the external global economic conditions remain critical to validating this projection.
According to our latest data, targets from notable firms include:
- JPMorgan: 1.10 for Mar26
- Goldman Sachs: 1.08 for Jun26
- Barclays: 1.09 for Mar26
How other firms see it
While MUFG’s outlook reflects a bearish view on the USD, some firms maintain a more cautious stance. Goldman Sachs echoes a similar sentiment to MUFG, indicating potential weakness, while Bank of America is more optimistic about the USD's stability.
The divergence in views can be summarized as follows:
- MUFG: Aligned with bearish USD sentiment.
- Goldman Sachs: Aligned, albeit cautiously bearish.
- Bank of America: Contrary, predicting stability in the near term.
Market Implications
A weaker USD could spark volatility in major currency pairs, leading to potential reassessments by traders and investors. This sentiment shift may promote increased demand for currencies of countries pursuing higher interest rates, complicating USD recovery prospects.
From the original
Lee Hardman, Senior Currency Analyst, and Abdul-Ahad Lockhart, Currency Analyst from London, discuss the FX market fallout from Fed Chair Powell’s keynote speech at Jackson Hole. Could diverging policies between the Fed and other major central banks drive the USD even lower?"
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