What’s next for the USD after Jackson Hole?
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
Risks include unexpected hawkish signals from the Fed or geopolitical developments that could influence risk sentiment. Moreover, if other central banks pivot to tighter policies sooner than anticipated, it may prompt a more rapid decline in USD valuations.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday the 22nd of August 2025, and joining Lee to pose some questions on the financial market themes for the week ahead is Abdullah Had-Lockhart, Currency Analyst from London. The following podcast is intended for professional investors and eligible counterparties only, and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Lee. Hi Abdullah Had.
So Fed Chair Powell has just delivered his keynote speech at Jackson Hole. What were your initial takeaways? Yes, certainly it has had a big negative impact on the dollar.
Initially we've seen the dollar fall by over half a percent against most major currencies in the initial aftermath of that speech, and to us that kind of sends a kind of clear signal that the Fed is kind of moving closer to resuming rate cuts. Fed Chair Powell did state quite clearly that they are willing to adjust policy in response to the rising downside risks to the U.S. labor market. He obviously had to acknowledge that the recent employment report was much weaker than the Fed had been anticipating, and with employment growth averaging just around 35,000 per month over the last three months, that's really kind of getting to the point where the Fed is obviously going to become increasingly concerned about whether the labor market weakens further from here.
They feel that they would have to take more prompt action to loosen monetary policy. So to us it does send a very clear signal to the market that if we get another similarly weak employment report at the start of September, then the Fed will be cutting rates by 25 basis points in September. So for the dollar, that to us is certainly a negative development in the near term and could lead to some further dollar weakness in the week ahead.
And Abdullah Had, I know you've been looking into past price action around Jackson Holes. What were your kind of takeaways? Yeah, thanks, Lee.
So this week we assessed whether pre-event volatility conditions measured by one month at the money implied volatility percentiles can help predict post-event FX price behavior for dollar yen and euro dollar. The focus was on five day cumulative returns following Jackson Hole, approximately a one week horizon. So when looking at dollar yen, when pre-event implied volatility was elevated, dollar yen experienced a larger absolute move in the price in the five days after Jackson Hole.
And when we looked at euro dollar, there wasn't really a consistent relationship between pre-event implied volatility and post-event moves. We also took a look at the DXY reversal dynamics, where we concluded that using the event day close as reference point, initial Jackson Hole impulses typically fully reversed within 10 trading days on average or a median eight days. So this pattern is symmetric.
Both dollar rallies and sell offs tend to fade over a two week horizon, reinforcing a fade the event day close bias. So given the current market context, our expectation of dollar yen having a muted reaction was proved wrong. Dollar yen is currently surging around 91 pips on the day, indicating a sharp repricing.
What's the implication for that? So the normalization process may take a little bit longer as markets recalibrate to new policy signals challenging assumptions based on pre-event volatility compression. So outside of the U.S., what are your expectations for the major central banks and potential impact on FX market performance?
Yeah, like I think certainly we think going forward, we do see some potential for divergence to open up between the Fed and other major central banks, with, like I say, with the Fed looking more likely to resume rate cuts in September and likely cutting rates at least two times by the end of this year. That could create more of a divergence there with other major central banks outside of the U.S. Certainly, we're becoming less confident in our view that European central banks like the Bank of England and ECB will cut rates further this year.
The data flow from Europe has been more positive than we had anticipated, with growth holding up better than we had initially anticipated. As we saw this week as well, the latest kind of business confidence surveys have shown certainly a stronger improvement in business confidence in August, which is obviously an encouraging development. It does indicate at the very least that the downside risks to growth in Europe have diminished in response to the recent trade deals that we saw signed between the U.S. and the EU and the U.S. and the U.K.
So with those downside risks diminished to the growth outlook, there's less pressure on European central banks like the Bank of England and ECB to cut rates further this year. And we're starting to see that being reflected more in the communication from those central banks. As you can see at their last policy meeting, indicated that there was now a higher hurdle for them to continue cutting rates every quarter, which has made it less likely that they'll cut rates again as soon as the November meeting.
And similarly, the ECB, we do expect them to start to indicate more strongly to the market that they're likely to keep rates on hold in September and potentially through the rest of this year. So with those major European central banks keeping rates on hold and the Fed cutting rates, that yield deferential story could trigger another leg lower for the dollar. And obviously, the dollar selloff would be reinforced further if we did see the market becoming more concerned about President Trump's interference in Fed policy setting going forward.
This week, we have seen fresh calls from President Trump to fire Fed officials. He previously has called repeatedly on Fed Chair Powell to step down and even threatened potentially to sack him. Obviously, we don't think he'll follow through on that threat.
But the new kind of threat, which we're watching more closely, is his threat to fire Fed Governor Lisa Cook. On that side of things, there is obviously a higher risk that he could follow through with that threat. And if she was to step down early from her term, was replaced by someone, Fed Chair, someone President Trump would pick as the next Fed Governor, that would only really strengthen his influence on Fed policy setting going forward.
And that's something we already expect to happen anyway when Fed Chair Powell is replaced next year. So, yeah, certainly the risk there that another Fed Governor could be replaced would certainly heighten downside risks for the dollar going forward. Thanks, everyone, for listening.
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Come back next week for more insights from the Global Markets Research Team.
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