MUFG’s Lee Hardman notes Fed Chair Warsh struck a less hawkish tone, with inflation expectations and risks having come down, and policy assumptions now based on no further Fed hikes. However, a stronger-than-expected Nonfarm Payrolls report or lower unemployment could reinforce current US Dollar strength, with Hardman warning the US Dollar could gain another 3–5% if the Fed hikes.

Warsh tone and NFP in focus

"The much anticipated comments from Fed Chair Kevin Warsh also struck a less hawkish tone than after the first FOMC meeting. He stated that “expectations of inflation over the first four weeks of this period, they’ve come down. Inflation risks have come down”. At the same time, he expressed optimism that AI will boost productivity growth in the US."

"However, he refrained from giving clear guidance over near-term policy direction reiterating that “we’re going to deliver price stability” and that “the tactics, the strategy and the rest, that’s still to come”. Our latest FX forecasts released yesterday are based on the assumption that the Fed will not raise rates. If we are wrong the US dollar could strengthen further by 3-5%."

"Today’s nonfarm payrolls report for June will be important in assessing the prospect of Fed rate hikes this year. Employment growth has rebounded robustly over the last three months by an average of 188k/month although it did follow a six-month period of flat employment growth. Today’s report is expected to reveal some moderation in employment growth back towards 110k in June."

"Yesterday’s ADP survey estimated private sector job gains of just under 100k. Market participants will also be closely watching the unemployment rate. It has held steady at 4.3% in recent months which has provided some reassurance to the Fed that the labour market is not tightening significantly and therefore requires rate hikes."

"To reinforce the US dollar’s current upward momentum another robust employment increase and/or drop in the unemployment rate will be needed."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)