The US dollar’s best daily performance since May came after Donald Trump announced his choice for a new Fed chair. Kevin Warsh may support the central bank’s independence. This calmed investors. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Donald Trump has selected the new chairman of the Federal Reserve.
- Kevin Warsh plans to lower interest rates and reduce the balance sheet.
- The US dollar has risen, while precious metals have fallen.
- Short positions on the EUR/USD pair can be considered on a breakout of 1.1835.
Weekly US Dollar Fundamental Forecast
It seems that the markets are fooling investors. When Donald Trump announced his choice for the new Fed chair, the US dollar strengthened, while precious metals collapsed. Investors believed that Kevin Warsh would support the Fed’s independence and focus on fighting inflation. This is good news for the greenback, but it does not align with the president’s vision of a weaker currency and the world’s lowest interest rates. The US government has clearly set a trap.
The fall of the EUR/USD pair sounds natural. During the week ending January 27, asset managers increased bearish bets on the US dollar to their highest levels since April 2025. Hedge funds reduced their net long positions in the greenback at the fastest pace since July 2024. The news about Kevin Warsh turned everything upside down, forcing speculators to close their previous trades.
Speculative Positions on US Dollar
Source: Bloomberg.
The market believes that naming the former FOMC governor as Fed chair reduces the risk of a sell-off of US assets. Unlike Kevin Hassett, he is less close to Donald Trump, which allows him to defend the central bank’s independence and earn the trust of other committee members. Congress shares this opinion, with some Republicans intending to vote against any candidate nominated by Donald Trump while Jerome Powell’s court case is underway.
However, Kevin Warsh is in favor of lowering rates and reducing the Fed’s balance sheet. In theory, this will lead to a fall in short-term Treasury yields and an increase in long-term rates. As a result, the yield curve will rise, which has historically led to a fall in the US dollar.
Fed Balance Sheet
Source: Bloomberg.
In my opinion, the US administration is a master of this game. Donald Trump has presented investors and members of Congress with a candidate who will not promote the “Sell America” agenda and, at the same time, inspire confidence among policymakers with his commitment to supporting the Federal Reserve’s independence. However, by May, everything will become clear. Kevin Warsh will likely show his true colors in the spring.
It will be interesting to see how Warsh influences FOMC officials. To strengthen the doves’ position in the Committee, inflation will need to slow, or the US labor market will need to cool. If this does not happen, what arguments will Kevin Warsh use to lower rates?
The US dollar’s reaction is mixed. The candidate for Fed chair believes that low inflation is possible in a strong economy. Rapid GDP growth is positive for the greenback, while low interest rates are negative.
Weekly EURUSD Trading Plan
In the short term, the EUR/USD pair may fall further, but the medium- and long-term outlook for the major currency pair remains bullish. If the price declines below the support level of 1.1835, short positions formed at 1.193 and 1.1895 can be increased.
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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