Kevin Warsh wants the markets, rather than the Fed, to determine interest rates. He prefers that the central bank talk less and act more. Silence increases uncertainty and the risk premium. Let’s analyze the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The Supreme Court ruled in favor of the Fed.
- Geopolitics has faded into the background.
- Markets are awaiting Kevin Warsh’s speech.
- The EUR/USD is trading within the 1.1355–1.1425 range, making range-bound trading strategies relevant.
Weekly Fundamental Forecast for Dollar
A wolf in sheep’s clothing—that is how many view Kevin Warsh. The question is: for whom? For Donald Trump, who is considering him as the next Fed chair? Or for the markets, which once expected him to pursue a more hawkish monetary policy? In any case, the US Supreme Court’s ruling that the president cannot remove Lisa Cook from her position as an FOMC governor has reinforced the Federal Reserve’s independence and strengthened the authority of the current Fed chair. Concerns that political pressure could undermine the Fed had been weighing on the US dollar. With those fears easing, the EUR/USD pair may retreat after its two-day rally.
Brent Crude Price
Source: Bloomberg.
The fact that oil prices have not risen in response to the escalation of the conflict in the Middle East and the subsequent negotiations allows investors to put geopolitics aside. Morgan Stanley notes that oil flows through the Strait of Hormuz have picked up following the US-Iran deal, while bearish factors for Brent—such as rising US exports and falling Chinese imports—remain in play. That is why Brent crude is falling, returning to pre-war levels, allowing markets to shift their focus to monetary policy.
As for the ECB, the situation is fairly clear. Christine Lagarde said that the regulator should not react aggressively to events in the Middle East. Opening a central bank symposium in Sintra, Portugal, Lagarde stressed that rate hikes were off the table for the foreseeable future. In other words, the European economy has shown resilience in the face of the collapse of Silicon Valley Bank, US tariffs, and, finally, the most severe oil crisis in history. This resilience allows the regulator to remain neutral, straddling the line between shocks the ECB can ignore and those that require a response.
Eurozone Inflation
Source: Bloomberg.
If we add the expected slowdown in European inflation to these hints of a prolonged pause, the central bank’s position becomes crystal clear. It intends to sit on the fence.
The Federal Reserve, on the other hand, is forcing investors to read between the lines to figure out what the regulator has not said. Kevin Warsh wanted the market to tell the Fed what rates should be. However, the central bank’s silence is heightening uncertainty, and under such conditions, markets demand a higher risk premium. Treasury yields are rising higher than they would if the Fed provided more clarity.
Investors fear that Kevin Warsh will emerge as a completely different person in Sintra, Portugal. Any dovish tones in his speech could send the US dollar tumbling.
Weekly Trading Plan for EUR/USD
With three unknowns currently weighing on the EUR/USD pair—including the US-Iran talks, the jobs report, and Kevin Warsh’s remarks—there is a high probability of consolidation. As a result, it would be better to refrain from trading or consider intraday trading within the 1.1355–1.1425 range.
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.
Price chart of EURUSD in real time mode
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