Kevin Warsh has sent mixed signals to the markets, at times sounding hawkish and at others more dovish. His latest remarks at Jackson Hole, however, clearly leaned hawkish. Does that mean the Fed chief will change his stance in September, and the central bank will refrain from a rate hike? Let’s examine the outlook and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The likelihood of a Fed rate hike in September is increasing.
- Treasury yields are at 19-year highs.
- The US dollar closed lower for the second consecutive month.
- Short trades on the EUR/USD pair can be considered below 1.1595.
Weekly Fundamental Forecast for Dollar
What game is Kevin Warsh playing? Speaking at a meeting of G20 finance ministers and central bank governors, he said the global economy had shifted from an era of secular stagnation to one of secular growth. Against this backdrop, current interest rates only appear high by historical standards. In reality, they may be doing less to restrain economic growth than they did in the past. Another round of hawkish rhetoric pushed the odds of a Fed rate hike in September to 66%. Yet, surprisingly, EUR/USD bears have retreated.
Global bond yields have climbed to their highest levels since mid-2008, while 30-year Treasury yields have reached a 19-year high. However, Goldman Sachs argues that these elevated levels are not necessarily a cause for concern. Instead, they reflect longer-term trends driven by financial decisions, rising debt, and broader economic developments.
Global Government Bond Yields
Source: Bloomberg.
At the same time, Scott Bessent’s intention to push US Treasury yields lower is well known, as are his remarks that the Treasury Department and the Fed are aligned. Add Donald Trump’s comment that Kevin Warsh will do what he is supposed to do, and the Fed chair’s hawkish stance becomes difficult to reconcile with the US administration’s broader objectives. Unless, of course, he is playing a different game.
According to Wells Fargo, the US dollar will weaken in September because the Fed will leave interest rates unchanged—even though Kevin Warsh has nearly convinced investors that monetary policy is set to tighten. Meanwhile, Scott Bessent has cited several reasons to avoid further monetary tightening. He argues that the economy is currently facing a supply shock and that rate hikes are generally warranted only when second-round inflationary effects are expected. Core inflation remains subdued, while productivity gains should help keep price pressures under control.
US Dollar Monthly Performance
Source: Bloomberg
Interestingly, the Treasury’s intention to bring US Treasury yields under control was one factor behind the US dollar’s second consecutive monthly decline. Another was Kevin Warsh’s cautious rhetoric at the press conference following the FOMC meeting. The Fed chair has alternated between sounding like a hawk and a dove, sending markets on a roller-coaster ride.
Although Kevin Warsh urged investors at Jackson Hole not to interpret his speech as forward guidance, markets treated his remarks as a signal of the Fed’s future policy moves. In reality, the central bank’s decisions remain data-dependent. That makes upcoming macroeconomic releases particularly important for gauging the Fed’s next steps.
Weekly Trading Plan for EUR/USD
Recent market volatility has prompted some traders to close their short positions in the EUR/USD. The risk of further consolidation is particularly high ahead of the release of US labor market data for August. If the pair falls below 1.1595, selling pressure may resurface.
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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