If the Fed stays silent instead of guiding the markets, investors have to figure out the path back to the 2% inflation target on their own. That weakens confidence and puts pressure on the US dollar. Let’s examine the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The Eurozone economy is outperforming the US economy.
- The chances of another ECB rate hike are rising.
- The Fed’s silence is weighing on the US dollar.
- If the EURUSD pair breaks above 1.154, consider adding to long trades.
Weekly Fundamental Forecast for Dollar
Markets doubt that Kevin Warsh is as committed to restoring inflation to the Fed’s 2% target as he claims. Meanwhile, the eurozone economy has overtaken the US economy for the first time since late 2025. Is that enough to fuel another EUR/USD rally? The pair climbed to a five-week high as Treasury yields fell and expectations of further Fed tightening continued to fade.
European Economic Performance
Source: Bloomberg.
A strong economy supports a strong currency. Eurozone GDP grew twice as fast as expected in the second quarter, rising 0.4% QoQ. Annual growth accelerated to 1.8%, compared with 1.6% in the US. The Eurozone was also more resilient to the Middle East conflict and the disruptions to energy supplies it caused. Meanwhile, higher imports weighed on U.S. GDP, as many of the components needed for AI technologies are sourced from abroad.
US GDP Growth
Source: Wall Street Journal.
Impressive Eurozone GDP and PMI data have reinforced expectations that the ECB will raise interest rates in September and could deliver two more hikes before the end of 2026. Those expectations are bolstering the EUR/USD pair, especially as another Fed rate hike appears less likely.
Kevin Warsh wants markets to focus on economic fundamentals rather than second-guessing the Federal Reserve. The problem is that the Fed is not just a referee but also a key player. If it fails to provide clear guidance, markets will be left to draw their own conclusions. How, then, will the FOMC interpret the signals generated by that uncertainty? Could they ultimately lead to even greater policy mistakes?
Markets price in what they expect the Fed to do, not what they think it should do. When investors understand the central bank’s intentions, they effectively help transmit monetary policy. A stronger economy pushes Treasury yields higher, cooling economic activity and making it easier for the Fed to bring inflation back to its target. But if the FOMC stays silent, markets will be forced to guess its next move. That could create uncertainty and distort the very signals policymakers rely on.
If Kevin Warsh expects markets to do part of the Fed’s job, then responsibility for the outcome will also fall on investors. That is unlikely to gain broad support within the FOMC. The current EUR/USD rally reflects disappointment with the Fed chair rather than the Federal Reserve as an institution. If that assessment is correct, the pair’s upside is likely to be limited.
Weekly Trading Plan for EUR/USD
The long trades opened at the lower boundary of the 1.137–1.147 consolidation range proved to be the right decision. The future trajectory of the EUR/USD pair will depend on how it tests the resistance levels of $1.154 and $1.1585. A breakout will create grounds for new long trades, while a pullback will be a reason to take profits and switch to short trades.
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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