Dollar and euro prepare for reaction to first speech by new Fed chair

On Friday, August 28, EUR/USD is trading in a range of 1.1643-1.1655 dollars – practically at the same level as yesterday. Market participants are still reluctant to make sharp moves, awaiting one of the key events of the day – the speech by US Federal Reserve Chairman Kevin Warsh at the annual economic symposium in Jackson Hole.

The symposium in Jackson Hole runs August 27–29 and is traditionally considered one of the most important events for global financial markets. It is here that heads of the largest central banks often signal future monetary policy. This year, investor attention is especially high because Kevin Warsh is speaking in Jackson Hole for the first time as Fed chairman.

Why Warsh's speech is so important for the euro

The main question for FOREX is what tone the new Fed chair will take regarding inflation and interest rates. So far, Warsh has avoided clear signals about the future decisions of the US central bank, which has increased uncertainty in financial markets.

The situation is particularly interesting against the backdrop of persistent inflation in the US and elevated yields on US government bonds. Traders currently assess the probability of a Fed rate hike as early as September at about 35%, and by December these expectations reach about 75%.

If Warsh takes a hawkish stance in his speech and signals that the Fed is ready to continue fighting inflation, the dollar may gain new momentum to strengthen. In that case, EUR/USD could fall below current levels.

At the same time, a more dovish rhetoric from Warsh – for example, an emphasis on risks to economic growth and readiness to cut rates – could lead to a weakening of the dollar. Then the euro would have an opportunity to return to growth.