Jackson Hole FX playbook: Can Warsh revive the dollar?

Key points:

• Jackson Hole is the next major test for the dollar. July Fed minutes kept a September hike firmly in play, with roughly one-third probability priced by markets.
• The dollar has weakened despite elevated Treasury yields. Fiscal concerns, Treasury intervention in the long end and questions around US policy credibility have pushed the dollar index towards three-month lows.
• Watch which yields move. Higher 2-year yields would be the cleaner USD-positive signal. Higher long-end yields without a front-end repricing could instead reflect fiscal and term-premium concerns — potentially bearish USD and bullish gold.

The Jackson Hole Economic Policy Symposium runs from 27–29 August, with this year's theme centred on financial innovation and its implications for payments and policy. But for markets, attention will be firmly on Fed Chair Kevin Warsh's first Jackson Hole appearance as chair and what it tells us about the Fed's reaction function.

Warsh has deliberately moved away from the heavy forward guidance of previous Fed regimes. That potentially makes Jackson Hole more, rather than less, important: markets still do not have a particularly clear roadmap for what would make the Fed hike again.

PCE comes first

There is one important complication: July PCE inflation arrives on Wednesday, 26 August, immediately before Jackson Hole.

Headline PCE was running at 3.7% y/y in June, while core PCE was 3.3%, still well above the Fed's 2% target.

That means traders should think about PCE and Warsh as one combined catalyst, rather than two separate events.

Scenario 1: Hot PCE + hawkish Warsh

USD higher, gold vulnerable

Sticky inflation followed by a hawkish Fed message could rebuild September hike expectations. The confirmation would be higher 2-year yields and a stronger dollar.

• EUR/USD: Failure around 1.1725 followed by a break of 1.1649–1.1631 could target 1.1587–1.1573.
• Gold: A hawkish Fed could trigger profit-taking, but the bearish signal would now require a move back below $4,500. Below there, $4,379–4,333 comes back into focus.

Risk: If only long-end yields rise while the front end barely responds, this becomes less clearly USD-positive.

Scenario 2: Soft PCE + cautious/dovish Warsh

Lower yields, weaker USD

Cooling inflation plus a patient Fed could push September hike expectations lower, particularly if the US 2-year yield falls.

• USD/JPY: A break below the 200-day average at 158.34 could reopen 155–156; 159.98–161.00 is the key resistance zone.
• Gold: The bullish breakout is already underway. Holding above $4,547 keeps $4,769 in focus, followed by $4,964 if falling real yields and a weaker USD reinforce the move.

This is probably the cleanest dovish Jackson Hole setup because both trades are highly sensitive to US real yields.

Scenario 3: Long yields rise, but USD falls

Fiscal concerns dominate Fed hawkishness

This is the scenario traders should not overlook. If 30-year yields rise while 2-year yields remain relatively stable and USD weakens, markets may be demanding a greater fiscal/term premium rather than pricing additional Fed tightening.

• GBP/USD: Holding above 1.3590 keeps momentum constructive; a break of 1.3696 could reopen the January high around 1.3868.
• Gold: Potentially the strongest expression of the fiscal-risk/debasement scenario. Gold is already above the previous $4,547 breakout level; continued gains despite rising long-end Treasury yields would strengthen the signal that markets are worried about US fiscal credibility rather than Fed tightening. Watch $4,769, then $4,964.

Bottom line

The most useful confirmation may come from gold and the yield curve together. If short yields rise and gold falls, markets are trading the Fed. If long yields rise while the dollar falls and gold rises, markets are trading US fiscal risk instead.