The Fed’s hawkish surprise allowed investors to quickly build up expectations for two rounds of monetary tightening in 2026. However, only a minority of FOMC members voted in favor of this scenario. The market is clearly getting ahead of itself again. Let’s analyze the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Markets may be getting ahead of themselves.
- Warsh has gained the FOMC’s confidence.
- The Fed is prioritizing inflation.
- Long trades can be opened if the EUR/USD pair returns above 1.145.
Weekly Fundamental Forecast for Dollar
Kevin Warsh said four times less about inflation than Jerome Powell did at his last press conference as Fed Chair. Moreover, his comments essentially echoed Powell’s. However, that was enough to send US dollar bears reeling. The USD Index posted its best two-day performance in three months amid the Fed’s hawkish tone.
As soon as Kevin Warsh announced the Fed’s commitment to bringing inflation back to the 2% target, CME derivatives increased the odds of at least two rounds of monetary tightening in 2026 to 53%. However, only 6 out of 18 policymakers mentioned such a scenario in their forecasts. The market reaction appears excessive, but the fact remains—the EUR/USD pair plummeted to its lowest level since mid-March.
Forecasts for Fed Funds Rate
Source: Wall Street Journal.
MUFG Bank believes that the hawkish signals have enabled the US dollar to make a bullish breakout, more than offsetting the negative impact of the agreement to reopen the Strait of Hormuz. Rising yields on short-term Treasury bonds are increasing the appeal of US assets, driving capital flows into the United States and strengthening the greenback against major global currencies.
ABN AMRO notes that Kevin Warsh rarely spoke about employment and emphasized price stability. The start of his term signals that the Fed will focus more on inflation than on the labor market.
Once again, markets appear to be jumping to conclusions. Donald Trump appointed Kevin Warsh as Fed Chair for a reason: the president expects lower interest rates. However, had Warsh immediately revealed his intentions, he would have risked repeating Stephen Miran’s fate. Acting in line with the US administration’s preferences, Miran consistently advocated aggressive monetary easing in both his forecasts and policy votes, yet his views carried little weight within the broader policy debate.
US Inflation Forecast
Source: Wall Street Journal.
Kevin Warsh’s immediate priority appears to have been earning the trust of the FOMC. Given that objective, adopting a hawkish tone was perhaps the most effective approach. Going forward, the economic data and market developments are likely to do much of the work for the new Fed Chair. According to Capital Economics, unlike in the eurozone, inflation in the United States has already peaked and is set to moderate further.
As a result, markets may soon reassess their expectations of two Fed rate hikes in 2026, a shift that could help the EUR/USD pair regain some ground.
Weekly Trading Plan for EUR/USD
Catching a falling knife is inherently risky. However, rising stock indices, declining US Treasury yields, and stabilizing oil prices suggest that the euro may be oversold. To consider long positions in the EUR/USD, traders should wait for either a rebound from the key support levels at 1.1400 and 1.1375 or a recovery of the pair above 1.1450.
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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