Kevin Warsh surprised investors with his strongly hawkish rhetoric at Jackson Hole. He does not believe monetary policy is currently restrictive and appears to have little confidence that inflation is slowing sustainably. Let’s take a closer look at the implications of his comments and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Kevin Warsh surprised the market with a distinctly hawkish speech.
- Markets have once again begun pricing in the possibility of two Fed rate hikes.
- Rising geopolitical risks are providing additional support for the US dollar.
- Short positions on the EUR/USD can be considered as long as the price remains below 1.16.
Weekly Fundamental Forecast for Dollar
Who is Kevin Warsh? A hawk in a dove’s suit—or a dove in hawk’s plumage? Markets were asking themselves this question even before his appointment as Fed chair, and nothing has changed since. While the central bank chief’s speech after the FOMC meeting sent the US dollar tumbling, his remarks at Jackson Hole had the opposite effect, giving the greenback fresh momentum.
Yield Curve’s Response to Warsh’s Speech
Source: Bloomberg.
A bear steepener is the term used to describe a situation in which short-term bond yields are rising faster than long-term yields. It signals that the Fed may be preparing to raise interest rates—and investors have every reason to think so. Two statements from Kevin Warsh have turned the market’s worldview upside down. The Fed Chair does not consider current monetary policy restrictive, nor has he been swayed by recent signs of slowing inflation.
Meanwhile, there were other notable remarks as well. Warsh emphasized that the Fed still had a great deal of work to do, that interest rates remain its primary policy tool, and that the 2% inflation target is a fixed objective. In Jackson Hole, Kevin Warsh made no attempt to hold back his hawkish rhetoric, surprising Deutsche Bank. The bank now expects the federal funds rate to be raised in both September and December, broadly in line with the latest signals from the derivatives market. Derivatives markets have increased the probability of monetary tightening in early fall from 38% to 60%. They now put the odds of two rate hikes in 2026 at roughly 50%.
Shift in Market Expectations Regarding the Fed’s September Rate Decision
Source: Wall Street Journal.
Kevin Warsh was more candid than ever—and his candor may have backed him into a corner. Markets interpreted his remarks as a clear signal that interest rates are likely to rise in September. At this point, only weak employment or inflation data ahead of the FOMC meeting could alter the outlook. Otherwise, the Fed may be forced to tighten monetary policy. If it fails to do so after the chairman’s hawkish rhetoric at Jackson Hole, confidence in the central bank’s credibility could begin to erode.
At the same time, Kevin Warsh risks drawing Donald Trump’s ire. The US administration is unlikely to welcome a resumption of monetary tightening ahead of the midterm elections. It can be a short step from love to hate, and the US president has clearly shown little patience. The resumption of US airstrikes against Iran, despite earlier emphasis on an economic blockade of Tehran, is a case in point.
An escalation of the conflict in the Middle East would provide a direct path toward higher inflation, a higher federal funds rate, and a stronger US dollar.
Weekly Trading Plan for EUR/USD
Short positions initiated at 1.170 and added to at 1.167 on the EUR/USD pair should be maintained. If the pair fails to reclaim 1.160, this would provide another opportunity to sell.
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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