New Fed Chair Warsh wants the markets to do all the heavy lifting for the regulator, and so far he is succeeding. The decline in inflation expectations suggests that investors are more than ready to do this for the Fed. Let’s analyze the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The Fed employs hawkish rhetoric.
- Inflation expectations are declining.
- The US administration seems concerned.
- Strong labor market data suggests selling the EUR/USD pair, and vice versa.
Daily Fundamental Forecast for Dollar
Kevin Warsh dismissed claims that his silence caused market uncertainty. In his view, the decline in rate volatility, falling Treasury yields, and lower inflation expectations are all signs that his strategy is working. Against this backdrop, the EUR/USD pair was little changed.
Both hawks and doves are comfortable with the outcome. This sums up the results of Kevin Warsh’s speech in Sintra, Portugal. The Fed chair noted that since the last FOMC meeting, future inflation expectations and inflation risks have declined. However, anyone who thinks the central bank will tolerate a PCE index exceeding the 2% target will be disappointed. At the same time, the Fed chief did not rule out a rate hike as early as July.
Even after the FOMC meeting, markets believed that Kevin Warsh’s hawkish rhetoric was aimed at tightening financial conditions, which ultimately leads to a decline in inflation expectations. The new Fed chair wants the markets to do the central bank’s job for it. They should pay less attention to the Fed and focus more on the data. The statistics suggest that there is no need to raise rates.
Manufacturing PMI
Source: Bloomberg.
The slowdown in the ISM Manufacturing Purchasing Managers’ Index and its price component, coupled with disappointing private-sector employment data from ADP, suggest that the economy and inflation are gradually cooling. Against this backdrop, tightening monetary policy would be a mistake.
Director of the White House National Economic Council Kevin Hassett called such a move a macroeconomic mistake. In his view, the US economy is growing thanks to an AI-driven productivity boom. Kevin Warsh reportedly held the same view before his appointment as Fed Chair, but he is now saying quite the opposite.
In fact, in the initial stages, introducing new technologies is typically inflationary. Only after some time will GDP growth occur without a simultaneous acceleration in consumer prices. However, Kevin Hassett’s remarks suggest that Donald Trump is beginning to lose patience. His idea of cutting interest rates is still on the table.
That said, Kevin Warsh emphasizes that the Fed has been independent and will remain independent. Moreover, the Supreme Court’s ruling on the Lisa Cook case has relieved the central bank of the need to respond to political pressures.
Daily Trading Plan for EUR/USD
Investors’ attention is shifting to the US labor market report for June. Strong statistics will increase the likelihood of monetary tightening by the Fed and provide an opportunity to sell the EUR/USD pair with targets of 1.1335 and 1.1275. Conversely, weak data will allow investors to buy the euro, targeting the 1.1455–1.1465 zone.
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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