Citi does not expect comments from Federal Reserve Chair Kevin Warsh at Jackson Hole to be the catalyst that turns around the dollar's recent depreciation. The bank's FX strategists argue that the more pressing threats to their view are related to how the dollar is valued in the market and how investors are positioned, rather than the prospect of a material hawkish surprise from the Fed chair.
At the July FOMC press conference, Warsh described possible approaches for his Jackson Hole address. One option would be a conventional 'setup' speech aimed at setting expectations for forthcoming meetings, while another would highlight the larger questions facing policy makers. Citi's strategists say the actual remarks may fall somewhere between those two formats, with a focus on medium-term themes that the Federal Open Market Committee is contemplating.
The team at Citi notes that increased discussion of productivity and artificial intelligence in the Fed Minutes would be consistent with a speech that leans toward those medium-term topics. They add that any early outputs from internal task force work relevant to policy direction could also shape the content of remarks.
Against that backdrop, Citi outlines three theoretical scenarios that would provide an incentive for Warsh to adopt a hawkish tone - and concludes that none of those scenarios currently apply. The first scenario would be a situation where the market has not priced in enough hawkish premium into the yield curve. With roughly 10 basis points priced for September, Citi judges that the curve already contains sufficient premium from the standpoint of financial conditions.
The second scenario would require a belief that only a hawkish surprise could rein in the back end of the Treasury yield curve. Citi's rates strategists do not share that view, noting that even an extreme outcome such as a further hike would be unlikely to unwind the recent increase in term premium.
The third trigger would be incoming data that signals a renewed acceleration of inflation. Citi's analysts point out that recent economic releases have broadly been softer, reducing the plausibility of that path at present.
On balance, the bank has shifted its FX stance from neutral to bearish on the dollar ahead of Jackson Hole. Using a real rates framework for EUR/USD - under the assumptions that the Fed holds policy steady, the ECB delivers another rate increase and oil prices normalise gradually - Citi's model indicates a path toward 1.18 in EUR/USD, while allowing room for overshoot.
However, strategists emphasise that risks to this baseline are driven more by market dynamics and geopolitical developments than by an unexpected hawkish pivot from Warsh. Specifically, they flag stretched valuation in EUR/USD and concentrated short-dollar positions among leveraged accounts as potential sources of volatility. Those positioning dynamics could prompt some trimming of dollar shorts around Jackson Hole.
Geopolitical risk tied to the U.S.-Iran situation is another factor Citi highlights. Rather than bake a re-escalation scenario into its central forecast, the team prefers a targeted hedge: a four-month NOK/SEK call spread to guard against conflict-driven market moves.
One narrow channel through which Jackson Hole could surprise on the hawkish side would be a preview of task force findings related to the Fed's balance sheet. Citi judges there is limited incentive for such a preview, particularly if coordination exists between Treasury leadership and Fed officials. More plausibly, any early task force commentary would focus on AI and productivity themes, which the strategists expect to be dovish or disinflationary in their implications.
Bottom line: Citi's FX team remains inclined to expect further dollar weakness into Jackson Hole, viewing valuation, market positioning and geopolitical developments as the primary risks to that view rather than an abrupt hawkish turn in Fed messaging.