MUFG’s Derek Halpenny notes the US Dollar is broadly unchanged after Fed Chair Warsh avoided fresh policy guidance, reinforcing market pricing for a low chance of an October hike. Warsh’s emphasis on AI as an inflationary demand shock, rising G10 FX and bond volatility, and doubts over 2027 rate hike pricing suggest limited near-term upside for the Dollar.
"The US dollar is broadly unchanged following the comments from Fed Chair Warsh. All we got from Warsh on monetary policy was the repeat emphasis that the Fed would remain focused on achieving its inflation goal. The lack of comment on policy was seen by market participants of an endorsement of current market pricing that implies only a small chance of a hike in October."
"Warsh’s explanation for the lack of guidance was that he doesn’t “pre-judged meetings”. His comments on AI certainly suggested the near-term risks from this new technology was inflationary given his belief that AI would be a demand shock to the economy before it becomes a supply-side shock. He also added that AI would “fundamentally change the conduct of monetary policy” that over time likely means greater uncertainty over the reaction function of the Federal Reserve and other central banks."
"Warsh gave little away today that underlines the potential for surprises ahead under this new Fed regime. We will likely get a better understanding of that when numerous working groups will report findings, including on AI and inflation. A December rate hike is still very likely but the pricing of hikes in 2027 looks overdone, which was a view expressed by New York Fed President Williams this week – one of the more senior members of the FOMC."
"That richness in the yield curve will likely act to curtail near-term momentum for further appreciation of the dollar."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)