Kevin Warsh’s view that markets can do some of the central bank’s work has resonated with other policymakers. Perhaps they won’t even need to raise interest rates to bring inflation and bond yields down. Let’s examine this idea and develop a trading plan for the EUR/USD.
The article covers the following subjects:
Major Takeaways
- Markets are anxiously awaiting Kevin Warsh’s speech.
- The ECB and the BoE support the Fed chair’s ideas.
- Central banks cannot control oil prices.
- It’s better to refrain from opening trades until the CPI data is released.
Weekly Fundamental Forecast for Dollar
The EUR/USD pair remains sensitive to oil price movements while investors keep a close eye on Kevin Warsh’s speech in Bangkok. His hawkish remarks following the June and September FOMC meetings, as well as at the Jackson Hole gathering of central bank governors, helped fuel a US dollar rally. In July, however, Warsh struck a different note, arguing that markets could do part of the Fed’s job by tightening financial conditions without further rate hikes. As the week draws to a close, the question is whether he can pull off this “hat trick” once again.
Warsh is emerging as a trendsetter. His view that rising bond yields can help tighten financial conditions without forcing central banks to pursue more aggressive monetary policy has found support among other policymakers. The Bank of England refrained from raising its policy rate at its latest meeting, noting that market rates were already delivering sufficient monetary tightening. The ECB expressed a similar view: minutes from its September meeting highlighted the role markets could play in shaping the future course of monetary policy.
Global Aggregate Bond Index Yield
Source: Bloomberg.
Therefore, global bond yields reaching 18-year highs do not, in themselves, warrant a response from central banks. Monetary policy cannot control oil prices, and a decline in Brent prices would likely ease both inflation expectations and bond yields. A similar pattern emerged in 2023, after the Fed concluded its monetary tightening cycle. Although bond yields continued to rise, the Fed refrained from further rate hikes. As a result, the 10-year US Treasury yield fell by 120 basis points over just two months. Could the Fed’s inaction trigger a similar yield decline this time around?
Global Inflation Rate
Source: Bloomberg.
In fact, three problems arise simultaneously. First, the experience of three years ago shows that inflation can remain above target for an extended period. Central bank inaction risks undermining their credibility and encouraging markets to behave as they please. Alan Greenspan once likened markets to an animal that sees its own reflection. Second, oil prices are not guaranteed to fall.
Escalating conflict in the Middle East may be virtually the only way for Iran to escape the impasse in which it has found itself. Against this backdrop, Brent crude prices are rising, pushing Treasury yields higher. According to the IMF, this surge in bond yields poses the greatest threat to global financial stability. As the risk of systemic disruption grows, investors are turning to the US dollar as a safe haven.
Weekly Trading Plan for EUR/USD
The EUR/USD pair is likely to experience a roller-coaster ride. Any decline after the inflation data release could trigger profit-taking, as traders weigh the risk of a dovish surprise from Kevin Warsh. For now, with markets awaiting the CPI figures, staying on the sidelines may be the most prudent strategy.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
