The new Fed Chair did not provide any additional guidance on future rates, but reaffirmed a strong commitment to returning inflation to the 2% target. Markets interpreted the message as a hawkish surprise, boosting demand for the US dollar and pushing EUR/USD quotes lower. Let’s examine the implications and develop a trading strategy.
The article covers the following subjects:
Major Takeaways
- The Fed aims to return inflation to its 2% target.
- Half of the FOMC members expect a rate hike.
- The likelihood of monetary tightening in September has increased.
- As long as the EUR/USD trades above $1.15, long positions can be considered.
Weekly Fundamental Forecast for Dollar
The US dollar posted its best rally since early March, while stock indices plummeted amid a hawkish surprise from the Fed. Kevin Warsh stated that the FOMC is determined and unanimous in its commitment to achieving price stability. Inflation has not fallen to the 2% target over the past five years, and the central bank wants to fix that. However, the new chair said nothing about raising rates.
Kevin Warsh was seen by the markets as something of a black box that investors could never unlock. Is he an inflation hawk, as he was in the past? Will he be a proponent of rate cuts, as he appeared to be in 2025, in order to be appointed by Donald Trump as Fed Chair? Warsh declined to vote on the federal funds rate projections. Nine of the 18 FOMC members signaled a tightening of monetary policy in their projections, which turned the futures market upside down.
Probability of 25-Basis-Point Rate Hike
Source: Bloomberg.
While the futures market had priced in a 20-basis-point rate hike in 2026 prior to the Committee’s June meeting, it now expects twice that amount—40 basis points. Goldman Sachs believes the Fed will raise rates as early as September. CME has raised the odds of a monetary policy tightening this month from 29% to 62%. They estimate the probability of two Fed rate hikes this year at 46%.
The devil is in the details. In fact, Kevin Warsh’s statement that if the Fed does its job, it will achieve low prices, strong economic growth, and strong employment—all at the same time—resembles rhetoric from the US administration. The same goes for the claim that the current surge in inflation stems from a supply shock. Does that mean it is temporary? Oil prices are falling, and the CPI and PCE will soon follow suit. So why raise rates?
Kevin Warsh said nothing about this. How exactly does he plan to bring inflation back to target? Perhaps the new Fed chair will let the markets do the central bank’s job. Indeed, falling stock indices, rallying Treasury yields, and a strengthening US dollar are already tightening financial conditions. Of course, this is unpleasant for investors and Donald Trump. However, the US president himself said that temporary pain is necessary for future prosperity.
The markets, as usual, reacted impulsively at first and then began to sort things out. Inflation in the US has peaked and will fall following Brent crude. If so, CME derivatives’ expectations of one or two Fed rate hikes are exaggerated. A reduction in these expectations will weaken the US dollar.
Weekly Trading Plan for EUR/USD
As a result, the EUR/USD pair declined, creating an ideal buying opportunity—at least as long as the euro remains above 1.15. Moreover, a drop below this level followed by a rebound above it also presents opportunities for long positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
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