The start of a monetary tightening cycle—rather than a single rate hike—is not the only factor behind the decline in the EUR/USD. Kevin Warsh has also helped restore confidence in the US dollar and US Treasuries. Let’s discuss these developments and build a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed has raised the federal funds rate for the first time since 2023.
- The market views this as the start of a cycle of monetary tightening.
- The central bank’s decisive action has restored confidence in the dollar.
- Short trades can be considered with targets of 1.1400 and 1.1300.
Weekly Fundamental Forecast for Dollar
The market expected confirmation that the federal funds rate hike from 3.75% to 4% would mark the start of a new rate-hiking cycle, and Kevin Warsh did little to challenge that view this time. As a result, the US dollar posted its strongest daily rally in three months. The last time the greenback strengthened by a comparable magnitude was following the June 17 meeting, with the same hawkish Fed chair and the same expectations of tighter monetary policy.
A resilient economy, persistent inflationary pressures, and a complex geopolitical environment were among the key factors behind the FOMC’s unanimous decision to raise rates. Meanwhile, Kevin Warsh’s remarks—that the Fed has scaled back monetary stimulus and is beginning to take the lack of progress on inflation seriously—further fueled the sell-off in the EUR/USD pair. This was one rate hike, not a reversal of all the rate cuts delivered in 2025. Yet the phrase “today’s action starts to show we’re serious about this” matters: it suggests the start of a new monetary-policy cycle rather than an isolated adjustment.
Fed Funds Rate Trajectory and FOMC Projections
Source: Wall Street Journal.
This rhetoric was reflected in the Fed’s forecasts: 16 of the 18 FOMC members expect at least one more federal funds rate hike in 2026, while four see two additional rounds of monetary tightening. As a result, the derivatives market raised the probability of a rate hike in October to 50% and in December to 88%. The probability of two hikes along the tightening path also increased, from 30% to 38%.
The Fed’s determination to combat inflation has also supported the bond market. Yields on 10-year US Treasuries have stabilized, while the sell-off driven by waning confidence in the central bank has paused. Investors have concluded that Kevin Warsh will not follow Donald Trump’s command. Despite the president’s repeated calls for interest rates of 1% or lower, the US administration did not characterize the Fed’s decision to tighten monetary policy as a mistake.
Restored confidence in the Fed, US Treasuries, and the dollar has become as important a driver of the EUR/USD’s decline as the prospect of a new monetary-tightening cycle. The derivatives market currently prices in three more Fed hikes over the next 12 months, compared with four for the ECB and five for the Bank of England.
Market Expectations for Fed Funds Rate
Source: Bloomberg.
If history is any guide, the greenback continued to strengthen for some time after June 17, before eventually losing ground as the conflict in the Middle East began to de-escalate. Could we see that pattern repeat this time? Much will depend on how the geopolitical situation unfolds.
Weekly Trading Plan for EUR/USD
Short positions opened at 1.164 and increased at 1.1555 proved to be a sound decision. The EUR/USD pair has reached its targets at 1.1505 and 1.1465. More short positions can be opened with targets of 1.1400 and 1.1300.
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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