How does Kevin Warsh view inflation’s reluctance to return to the target? Is it temporary or a reflection of a strong economy? Investors are awaiting clues from the Fed Chair. Let’s examine the issue and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Inflation is nearly twice the Fed’s target.
- The US economy is expected to accelerate in the third quarter.
- The dollar needs clear guidance from Kevin Warsh.
- Short positions on the EUR/USD opened at 1.170 can be maintained.
Weekly Fundamental Forecast for Dollar
Two of the three wild cards have already been played. The last one remains: Kevin Warsh’s speech at Jackson Hole. The market was in no rush to buy NVIDIA shares, despite the company’s financial results beating expectations for the 15th consecutive time. The reasoning is that the figures are already so strong that further significant growth in earnings and other key metrics may be difficult to achieve. The PCE report reminded markets that inflation remains nearly twice the Fed’s target. This pushed the odds of a September rate hike to almost 40% and allowed the US dollar to recover half of the losses triggered by the Treasury’s plans to influence government bond yields.
NVIDIA’s Projected and Actual Results
Source: Wall Street Journal.
Kevin Warsh inherited an economic situation that can be viewed in two ways. If one assumes inflation is stuck significantly above the target because of one-off factors—such as tariffs or energy supply issues stemming from the crisis in the Middle East—then there is no need to raise rates. Over time, these effects will fade, and the PCE will decline.
On the other hand, if consumer prices are high because of a strong US economy, the Fed will have to step in. Inflation will continue to rise, and over time, monetary policy will have to be tightened aggressively. Unless this is done in time. At the same time, the 1.5% GDP growth in the second quarter—confirmed by the second estimate—should not be misleading. In the third quarter, Bloomberg analysts expect the figure to accelerate to 2.5%.
Which interpretation of inflation is more in line with Kevin Warsh’s views? Investors are waiting for clues from Jackson Hole and speculating on the implications. According to Standard Chartered Bank, the best outcome for the US dollar would be for the Fed chair to endorse raising rates if the deflationary trend stalls. Otherwise, if the central bank chief sends no signals, the USD index will plummet. Given his tendency toward silence, the second scenario seems more likely.
This is precisely what is holding back EUR/USD bears. The rise in Treasury yields following the Treasury Department’s announcement of increased minimum buyback volumes was reversed. According to Bank of America, investors are questioning just how aggressive the Treasury’s actions to suppress debt market rates might be. Coupled with the wild card from Jackson Hole, this is causing the major currency pair to consolidate.
30-Year Treasury Yield
Source: Bloomberg.
Rising political risks in France and elevated natural gas prices are pressuring the EUR/USD pair, resembling the 2022 energy crisis. At the height of the crisis, the euro fell below parity against the US dollar.
Weekly Trading Plan for EUR/USD
As a result, it is better to adopt a wait-and-see approach and stay out of the market for now. If you have short positions on the EUR/USD formed at 1.17, you can maintain them.
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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