While investors are criticizing Kevin Warsh and considering how to deal with the collapse of US stock indices, the ECB is making a decision on interest rates. The dovish tone in its comments will affect the EUR/USD pair. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Senate defends the Fed’s independence.
- The US economy continues to perform well.
- The ECB will not help the euro.
- Short trades on the EUR/USD pair can be opened below 1.1775.
Weekly Euro Fundamental Forecast
What is more beneficial to the US dollar: Kevin Warsh or the high risk of his nomination for Fed chair being rejected by the Senate? The Senate Banking Committee holds a narrow 13-11 Republican majority. However, Tom Tillis has promised to vote against Donald Trump’s nominee while the lawsuit against Jerome Powell is underway. If Congress defends the Fed’s independence, investors can safely buy the U.S. dollar.
Meanwhile, EUR/USD bears are gaining traction. Investor confidence in the US dollar is returning, the US services sector is outperforming forecasts, and FOMC officials are adopting a moderately hawkish tone. Lisa Cook said she was more concerned about inflation than unemployment. If there are no major shocks to the labor market, the Fed should focus on fulfilling its mandate to bring the PCE back to 2%.
This speech, coupled with the 0.2% increase in the PMI services report above the 12-month average, argues for keeping the federal funds rate unchanged for a long time. Against this backdrop, EUR/USD bears are pushing the pair down. After all, even if Kevin Warsh’s nomination is approved by the Senate, his ideas are nothing more than pure theories. They need to be confirmed by statistics. On the contrary, criticism of the Fed could prevent the new chairman from building consensus.
US Stocks and Bonds Owned by Non-US Residents
Source: Bloomberg.
The decline in EUR/USD quotes is driven by the sharpest two-day drop in US stock indices since April. Yet, it is not so much about the US dollar’s status as a safe-haven asset. It is more about capital flows. Non-residents continued to buy US shares, hedging currency risks by selling the greenback. The decline in the S&P 500 index forced investors to close their positions and liquidate their hedges. As a result, the USD index rose.
The ECB is unlikely to throw the euro a lifeline. When the EUR/USD pair surged to 1.21 at the end of January, the European Central Bank was preparing to sink the regional currency. In 2025, it was one of the reasons for the January slowdown in eurozone inflation to 1.7%, the lowest in more than a year.
EU Inflation
Source: Bloomberg.
If disinflationary processes in the currency bloc continue to gain momentum, Christine Lagarde will be forced to return to a cycle of monetary expansion. This will come as a bolt from the blue for the EUR/USD pair. Therefore, any dovish signals from the ECB following its meeting on February 5 will be a reason to sell the euro.
Weekly EURUSD Trading Plan
The lower EUR/USD quotes fall, the more apparent the effectiveness of short positions opened at 1.193 and 1.1895 becomes. The pair failed to return above 1.1835, signaling the weakness of bulls and allowing bears to increase their positions. In addition, short trades can be opened on a breakout of the support level of 1.1775.
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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