- Warsh said if inflation remains elevated, the Fed would have a lot of work to do.
- Traders are pricing a 57% chance of a Fed rate hike in September.
- Economists expect an increase of 58,000 jobs in the US in August.
Currency futures were subdued on Monday as the dollar remained elevated after Friday’s rally. The greenback soared after the Fed Chair’s comments increased rate hike expectations. Market participants are now looking forward to the non-farm payrolls report for more clues on policy.
The US dollar had a stellar week, putting pressure on most of its peers. Economic data from the US released last week all came in line with expectations. The core PCE, a major gauge of inflation for the Fed, came in at 0.2%, up from the previous month’s 0.1%. Meanwhile, the preliminary GDP reading was 1.5%.
Fed rate hike expectations (Source: Bloomberg)
The main catalyst for the dollar came during the Jackson Hole symposium, where Fed Chair Kevin Warsh spoke. In his speech, he noted that inflation remains hot. Moreover, he said, if it remains elevated, the Fed would have a lot of work to do.
However, he failed to give any forward guidance on future meetings. Nevertheless, market participants interpreted his comments as hawkish, sending rate-hike bets higher. Before the speech, there was a 31% chance of a September rate hike. This likelihood rose to 57%, boosting the dollar.
“Warsh’s defense of the inflation target has reduced a major drag on the US dollar and shifted the focus back to economic fundamentals,” said OCBC’s FX strategist Sim Moh Siong
The rally in the dollar weighed on its peers, such as the euro, pound, and yen. On Monday, focus shifted to the Middle East. Reports on Sunday revealed that the US attacked an island in Iran, causing concerns of an escalation.
Last week, Iran and Oman signed a deal to jointly manage the Strait of Hormuz. Meanwhile, the US announced plans to impose sanctions on Iran. The bombs and missiles had paused briefly. However, with no long-lasting peace deal, the war could escalate at any time. As a result, traders will likely remain cautious, which could further support the safe-haven dollar.
This week, market participants will focus on the Bank of Canada policy meeting. The central bank will likely keep interest rates unchanged. Meanwhile, the US will release its crucial monthly employment report. Economists expect an addition of 58,000 new jobs. This would be a significant improvement after the economy lost 23,000 jobs in July.