The markets appear to have figured out Kevin Warsh. Investors increasingly believe he sees little need to raise interest rates, regardless of whether Treasury yields rise or fall. That dovish perception is weighing on the US dollar. Let’s examine the outlook and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- De-escalation sent the US dollar tumbling.
- Brent fell below $80 per barrel.
- Kevin Warsh is not a hawk.
- Strategies targeting a return of the EUR/USD to the 1.1500–1.1565 range remain relevant.
Weekly Fundamental Forecast for Dollar
Investors have chosen to take Scott Bessent at his word. The Treasury Secretary’s comments that an agreement with Iran could be reached within days, the Strait of Hormuz would reopen, and oil prices would decline triggered a sharp drop in Brent below $80 per barrel. Easing geopolitical tensions lifted the S&P 500 to fresh record highs, while Treasury yields retreated to pre-July FOMC meeting levels. Together, these developments created a favorable backdrop for EUR/USD bulls.
This time, Donald Trump appears to have made the right choice. During his first term, he appointed Jerome Powell as Fed Chair, only to become one of his fiercest critics. Kevin Warsh seems better positioned to advance the US administration’s preference for lower interest rates. Initially, he adopted a hawkish tone, helping to curb inflation expectations and reassure FOMC members who favored tighter monetary policy.
US Inflation Expectations
Source: Bloomberg.
Then came the shift to a dovish stance. Kevin Warsh’s logic is straightforward: if Treasury yields are rising, there is no need to raise interest rates because tighter financial conditions are already doing the Fed’s job. If yields are falling, tightening policy makes even less sense. Investors are increasingly concluding that the futures market has overstated the likelihood of further monetary tightening. As those expectations fade, the US dollar is coming under pressure.
Indeed, Scott Bessent’s suggestion that a US-Iran peace agreement could be reached soon was enough to reduce the implied probability of a September hike from 67% to 57%. At the same time, the odds of two rate hikes in 2026 fell from 44% to 37%.
The challenge is that the Fed is not a one-man institution, even if that one man is Kevin Warsh. The FOMC still includes several hawkish policymakers. Kansas City Fed President Jeff Schmid has argued that current monetary policy is not restrictive enough and has expressed support for further tightening. If he were a voting member this year, he would likely join the dissenters calling for higher rates.
US Nonfarm Payrolls and Unemployment Rate
Source: Bloomberg.
Ultimately, expectations for further monetary tightening—and the Fed’s policy decisions—will depend on incoming economic data, which is exactly what Kevin Warsh wants. A stronger labor market could make the US dollar shine again. Payroll growth is expected to accelerate from 57,000 to 85,000 in July, while the unemployment rate is forecast to remain unchanged at 4.2%.
Weekly Trading Plan for EUR/USD
Despite a favorable backdrop, the EUR/USD pair posted only a modest rally, suggesting that investors prefer to wait for US labor market data. The pair is likely to consolidate within the 1.1500–1.1565 range. A breakout beyond either boundary, followed by a pullback, could offer a sell or buy signal for the euro.
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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