If it is not the bond market, macroeconomic data will allow the Fed to monitor developments passively. A cooling US economy reduces the need for the central bank to tighten monetary policy. Let’s examine this situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- US retail sales declined in July.
- The likelihood of a Fed rate hike in 2026 is declining.
- The US dollar found support from oil prices.
- Long positions on the EUR/USD can be considered if the price settles above 1.1585.
Weekly Fundamental Forecast for Dollar
Kevin Warsh believes the bond market can do the Fed’s job. He may not be alone in that view. So why shouldn’t weak macroeconomic data end the central bank’s plans to raise rates in 2026? Following declines in employment and inflation, retail sales and consumer sentiment also delivered some unpleasant surprises. As a result, the EUR/USD pair surged toward 1.16.
US Retail Sales
Source: Wall Street Journal.
Kevin Warsh’s “not by word, but by deed” approach is gradually turning into “neither by word nor by deed.” Only three FOMC officials voted to raise the federal funds rate at the latest meeting, while the rest remained on the sidelines. The Committee does not appear to be as hostile toward the new chair as Donald Trump claims. Signs of a rift within the Fed will likely be the main focus of the minutes from the July meeting, which investors will be watching closely.
However, much has happened since then. A series of disappointing US economic data releases suggests that the economy is cooling. Under such conditions, the Fed may be able to avoid tightening monetary policy—precisely what the US administration wants. Donald Trump’s wishes appear to be coming true, and one of his long-standing goals, as investors well remember, is a weaker dollar.
Market Expectations for Fed Interest Rate
Source: Bloomberg.
The rally in the EUR/USD—fueled by disappointing US retail sales and University of Michigan consumer sentiment data, as well as a decline in the probability of a Fed rate hike in September to 64%—could have been stronger. The renewed rally in Brent crude, however, hindered the euro’s advance. Oil prices climbed amid another escalation in the Middle East, with Israel launching strikes on Lebanon in retaliation for attacks by Hezbollah.
The situation in the region remains extremely tense, with no clear end to the conflict in sight. Unlike the US, which is pushing for an end to hostilities, Iran maintains that the war has not even truly begun. Hardliners have consolidated their grip on power and appear largely unconcerned about the state of the economy. Their priority is to deter the US-Israeli coalition from launching further attacks.
The combination of a cooling US economy and Brent crude remaining in the $80–90 per barrel range creates a bearish backdrop for the US dollar. Against this backdrop, inflation is more likely to stabilize or continue declining, reducing the need for the Fed to tighten monetary policy in 2026. Most likely, this is precisely the direction Kevin Warsh will seek to steer the Committee.
Weekly Trading Plan for EUR/USD
The cooling US economy is increasing the risks to the ongoing EUR/USD rally. It may make sense to add to long positions opened at 1.154 if the major currency pair consolidates above 1.1585.
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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