Has the market managed to do the Fed’s job for it, as Kevin Warsh would like? The answer may lie in the July inflation report. If the roller-coaster ride in Treasury yields succeeds in bringing inflation down, the Fed chair could emerge victorious. Let’s analyze the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Inflation will set the record straight.
- The US and Iran are demanding reparations.
- Kevin Warsh’s credibility is on the line.
- A rebound from 1.1525 could provide an opportunity to open long positions on the EUR/USD.
Weekly Fundamental Forecast for Dollar
As tensions escalate in the Middle East, investors are on pins and needles awaiting the US consumer price report for July. Against the backdrop of a weaker but still balanced labor market, an acceleration in core inflation above the 0.2% expected by Bloomberg analysts would mean the figure is moving further away from the 2% target, rather than closer to it. Meanwhile, the futures market still expects the Fed to tighten monetary policy in 2026, providing support to EUR/USD bears.
US Inflation
Source: Bloomberg.
In the latest FOMC projections, about half of the officials expected the federal funds rate to remain unchanged this year. In their view, the impact of rising energy prices will fade just as quickly as the impact of tariffs—as soon as the conflict in the Middle East ends. However, the conflict shows no signs of ending, and massive investments in artificial intelligence are becoming a new source of inflationary pressure.
Following Iran’s demands for reparations, Donald Trump put forward counter-conditions. Tehran must pay compensation for the hundreds of thousands of lives it has taken—including protesters and residents of neighboring countries. In other words, this clause will definitely be included in future agreements. However, with each passing day, chances of reaching such an agreement are becoming slimmer. Although the US president is focusing on an economic blockade of Iran, an escalation is on the horizon. With it comes a resumption of hostilities, a rally in Brent crude prices, and an acceleration of so-called transitory inflation. Is there anything more permanent than the temporary? If so, expectations of at least one monetary tightening move by the Fed in 2026 appear justified.
Market Expectations for Fed Interest Rate
Source: Bloomberg.
The July inflation report is extremely important for Kevin Warsh. When asked whether higher interest rates would be an option if inflation failed to decline, the Fed chair said they would be part of the solution. However, he made clear that they would not be the primary tool. Instead, the central bank chief appears to favor rising Treasury yields as a means of tightening monetary conditions. The market interpreted this as a sign that he intends to fight inflation with words rather than action. As a result, the US dollar weakened considerably.
Since then, 30-year Treasury yields have surged before returning to the levels seen when Kevin Warsh outlined his position following the FOMC meeting. Doubts about whether the Fed will take action to curb inflation have intensified. However, if CPI continues to slow, the Fed chair could emerge unscathed. The market will have done the central bank’s job for it.
Weekly Trading Plan for EUR/USD
Against this backdrop, short positions in the EUR/USD opened at 1.1565 can be maintained. However, traders should be prepared to switch to long positions either on a rebound from the 1.1525 support level or if the July US inflation data comes in weaker than expected.
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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