The probability of a September rate hike by the Federal Reserve soared from 35% to 60% following Kevin Warsh's speech at Jackson Hole, and the dollar, which was balancing on the edge of a downward breach just a week ago, received a powerful boost towards strengthening.

Warsh's key task was to restore confidence in the Fed. After the July meeting, where he allowed himself vague formulations suggesting that the market could "do the Fed's work" through rising yields, he faced criticism, and investors began to doubt the Fed's commitment to fighting inflation. These doubts pushed long bond yields higher, creating problems for the U.S. budget. Warsh had to dispel these concerns, which is why his speech was frankly hawkish.

He acknowledged that progress in combating inflation over the last two years has been limited, financial conditions have not been entirely restrictive, and the Fed is willing to take responsibility for this. Between the lines, it was understood that yes, a rate hike will be necessary.

The key date now is September 11 — the release of the August inflation report. If it shows acceleration, the market may price in a September hike with probabilities exceeding 80%. If the data comes in softer, Warsh may reference a "data dependence" and maintain the rate.

The CFTC report showed that the aggregate long position in the dollar against major currencies is rapidly decreasing, down $8.4 billion to $26.2 billion. The predominance remains strong, but investor sentiment is evident, and only Warsh's hawkish speech at Jackson Hole is currently supporting the dollar.

Now the question is how sustainable the market's initial reaction to Warsh's speech will be among investors going forward. The U.S. economy is considered resilient, with forecasts suggesting that U.S. GDP will continue to grow at a rate of about 2% in 2026–2027, supported by investments in artificial intelligence and sustained consumer demand.

The labor market is still seen as balanced, and the unemployment rate is expected to remain near current levels. This optimism gives Warsh grounds to believe that the economy can "withstand" a rate hike if needed.

The inflation outlook remains complicated. The core PCE (the Fed's preferred indicator) is expected to remain above 3% through the end of the year and only begin to decline toward target levels in 2027. Moreover, risks are skewed to the upside: high energy prices linked to the conflict in the Persian Gulf could reignite inflation at any moment.

The conflict around the Strait of Hormuz is perhaps the most challenging factor for the dollar. It no longer provides the clear bullish momentum observed in July, but it also does not allow the dollar to fall freely. According to estimates from Goldman Sachs, oil exports from the Persian Gulf have recovered to about two-thirds of pre-war levels, averaging around 15-16 million barrels per day, and military parity remains. It seems the conflict has entered a phase of "managed escalation". It no longer creates panic demand for safe assets, but it does not allow markets to fully rule out the risk of a large-scale closure of the strait. In the short term, this is more of a neutral factor: the dollar has lost its geopolitical premium but has not received a new negative impulse.

A hawkish scenario is becoming slightly more likely, suggesting that the Fed will raise rates in September. In this scenario, the dollar will strengthen against all major currencies, and the EUR/USD pair could retrace to 1.15 and lower.

Conversely, if inflation continues to slow and retail sales and the labor market disappoint, there will be no grounds for a rate hike, and markets may begin to price in a 2027 rate cut. In this case, the dollar will resume its downward trajectory, and EUR/USD will attempt to test its high of 1.1710 and move higher. We consider this scenario to be less likely than the bullish one, but only slightly.

And, of course, there remains the open scenario of a sharp escalation in the Strait of Hormuz. Iran could completely close the strait; oil prices would soar, and the dollar would once again gain strong momentum as a safe-haven currency. However, the probability of such a development seems low.