Fed funds futures put the probability of a September rate hike at 58%, well short of a done deal, even after Fed Chair Kevin Warsh's hawkish Jackson Hole speech sent EUR/USD lower on Friday. By Monday, EUR/USD was little changed, while Fed's Hammack pushed for immediate action and Danske Bank expects only one more ECB hike.
Fed Chair Kevin Warsh struck a hawkish tone at the Jackson Hole symposium on Friday, reaffirming that the 2% PCE inflation target remains a firm and fixed goal and warning that more action may be needed if price growth doesn't slow fast enough. The remarks marked a shift from his July press conference, where he had emphasized markets' role in setting the direction of rates.
Warsh's comments send EUR/USD lower
The hawkish tone sent EUR/USD lower on Friday, and the dollar strengthened against both the euro and the yen. Warsh said inflation data are more concerning than labor-market trends, pointing to the Fed's preferred gauge, PCE inflation at 3.7%, against the central bank's 2% target.
He also noted that over the past year, more than half of goods and services tracked by the government saw price increases of 3% or higher, well above the roughly one-third that saw comparable increases in the two decades before the pandemic. By Monday morning, EUR/USD was more or less unchanged, with a modest rebound also visible in USD/JPY.
A hike, but not yet a done deal
Despite the hawkish rhetoric, CME's FedWatch tool put the probability of a September hike at 58%, a long way from the 90%-or-higher reading that typically qualifies as a done deal. Jim Bianco, founder of Bianco Research, wrote on X: "The next Fed meeting is a lean hike not a done deal."
Yet not every Fed voice is hedging. Fed's Hammack, who voted for a rate hike at the last meeting, called for immediate action and warned that waiting risks creating further pain. She expects inflation to end the year around 3% and does not view current financial conditions as restrictive.
The euro side of the equation
German flash HICP inflation for August is expected to rise to 3.1% y/y from 2.8%, driven by energy prices, ahead of tomorrow's euro-area-wide release. The market is now priced for close to two additional ECB rate hikes.
Danske Bank's own view is that the ECB delivers only one further 25bp hike.
Sources: CoinDesk, ActionForex
Trading involves risk.
Risk Disclaimer
