Donald Trump’s silence and Scott Bessent’s endorsement suggest that Kevin Warsh is pulling the strings behind the scenes. The Fed has no plans to raise rates, contrary to market expectations. This disappointment will likely reverse EUR/USD quotes. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The EUR/USD is falling due to widening yield differentials.
- The Fed’s hawkish stance is curbing inflation.
- Markets need clear evidence that current expectations are misplaced.
- Long positions can be considered if the EUR/USD pair breaks through 1.1380.
Weekly Euro Fundamental Forecast
The markets could only guess what Kevin Warsh meant. He emphasized bringing inflation back to target, which was interpreted as a hawkish shift in the Fed’s stance. As a result, the EUR/USD pair fell during five of the last six days and hit a yearly low. Derivatives markets are pricing in two rounds of monetary tightening in 2026, with the first expected in September. As a result, the yield spread between US and German bonds has widened by approximately 20 basis points since the last FOMC meeting, dealing a severe blow to the euro.
EUR/USD Price and US-Germany Bond Yield Spread
Source: TradingView.
J.P. Morgan forecasts the EUR/USD to fall to 1.1 and notes that during the previous four cycles, the major currency pair declined by an average of 15% before the first federal funds rate hike. Markets believe that if the Fed is indeed planning to begin a cycle of monetary tightening, it should do so in July rather than in September. The reasoning goes that tightening monetary policy on the eve of the US midterm elections would ensure the ruling Republican Party’s defeat.
Falling stock indices, a rally in Treasury yields, and a strengthening US dollar are not what the US administration expected from Kevin Warsh. However, given Scott Bessent’s approval of his actions and Donald Trump’s silence—who previously criticized every Fed decision to the bone—it seems there is serious behind-the-scenes play underway. At the same time, the decline in inflation expectations in the US suggests that the new Fed chair’s more hawkish stance is paying off. The markets are doing the Fed’s job for it.
US Inflation Expectations
Source: Bloomberg.
In fact, the Fed is not going to tighten monetary policy. In June, 9 FOMC members voted in favor of tightening, while the other 9 voted to keep rates steady or even cut them. The chair’s vote is decisive, and Kevin Warsh will almost certainly vote against tightening. Instead, the Fed may allow market forces to do the heavy lifting: by tightening financial conditions, inflation will be brought under control.
The markets clearly misinterpreted the new Fed chair’s silence. However, to prove this, there should be signs of a slowdown in consumer prices. If May’s personal consumption expenditure (PCE) data comes in below forecasts, it will help the EUR/USD pair stabilize. The PCE index is expected to accelerate from 3.8% to 4.1% YoY and from 0.4% to 0.5% MoM.
Weekly EURUSD Trading Plan
Markets tend to react first and ask questions later. This time, that reaction dealt a heavy blow to the euro. Can the single currency stage a recovery? The first requirement has already been met: the EUR/USD managed to hold above the 1.135 support level. To open long positions, traders now need to see softer-than-expected inflation data and a breakout above 1.1380.
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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