Kevin Warsh believes the Federal Reserve should take its cues from the market. Under this approach, rising Treasury yields would imply that the central bank should raise interest rates. However, is such an approach justified? Let’s explore the implications and outline a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The Fed pays closer attention to market signals.
- The market is pressuring the Fed to raise interest rates.
- The US dollar will benefit from rising geopolitical risks.
- Positions on the EUR/USD pair can be opened after Kevin Warsh’s speech.
Daily Fundamental Forecast for Dollar
The market discounts everything. It seems that not only technical analysts but also Kevin Warsh agree with this statement. He considers market signals to be the most important source of information for the Fed’s decision-making and does not want investors to try to predict the central bank’s reaction based on macroeconomic statistics. However, you cannot change the system so rapidly. The less the Fed says, the more closely the markets listen. They hold their breath, catching every word. As a result, the EUR/USD pair has fallen into a consolidation phase ahead of the FOMC Chair’s speech.
Once you get used to having every detail spoon-fed to you, you cannot help but second-guess Kevin Warsh. His emphasis on bringing inflation back to target was interpreted by investors as a signal of aggressive monetary tightening. CME derivatives quickly raised the odds of two Fed rate hikes in 2026 to 50%. If the Fed were to start reacting to the markets, it would simply be forced to tighten monetary policy.
Likelihood of Fed Monetary Tightening
Source: Wall Street Journal.
According to HSBC, if this happens and geopolitical risks increase, the US dollar will strengthen significantly over the next 12 months. For the USD index to fall, macroeconomic data would need to deteriorate, reigniting talk of a cut in the federal funds rate.
The first scenario seems more plausible. According to the Wall Street Journal, Donald Trump is considering resuming full-scale military operations in the Middle East but prefers diplomacy. US officials believe that new airstrikes against Iran would signify the collapse of the peace agreement. However, the current situation is far more conducive to an escalation of armed conflict than it was in February.
At that time, a blockade of the Strait of Hormuz was perceived as a doomsday scenario. Today, it is clear that the oil market has adjusted swiftly, and flare-ups of geopolitical risks do not trigger sharp spikes in Brent prices. Donald Trump can rest assured that Brent crude will not rise to $150 or $200 per barrel. A global economic crisis is out of the question, too.
Speculative Positions on US Dollar
Source: Bloomberg.
At the same time, an escalation of the conflict in the Middle East will almost certainly boost the US dollar as a safe-haven asset. Speculators’ hopes for a rally in the dollar seem justified.
However, the markets have seen through Donald Trump. He talks a lot but does little. He is the complete opposite of Kevin Warsh. It remains a mystery how Warsh came to be appointed Fed chair by the US president.
Daily Trading Plan for EUR/USD
Hawkish rhetoric from the central bank governor in Sintra will allow investors to sell the EUR/USD pair with a target of 1.12. Conversely, a dovish surprise will likely trigger a rally toward 1.155.
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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