The market prices in everything. It seems this is a conviction shared not only by technical analysts but also by Kevin Warsh. He views market signals as the primary source of information for the Fed’s decision-making and wants to discourage investors from trying to second-guess the central bank’s reaction to macroeconomic data. Alas, breaking the system is easier said than done. The less the Fed speaks, the more intently the markets listen. They freeze, hanging on every word. It’s hardly surprising, then, that EUR/USD has slipped into consolidation ahead of the FOMC Chair’s upcoming speech.
Brevity is the soul of wit. But when you’re used to having everything spoon-fed to you, you start reading between the lines for Kevin Warsh. His emphasis on bringing inflation back to target was instantly interpreted by investors as a signal of aggressive monetary tightening. CME derivatives quickly priced in a 50% probability of two Fed rate hikes in 2026. If the Fed were to actually react to the markets, it would practically be obliged to tighten monetary policy.
According to HSBC, if this scenario unfolds alongside rising geopolitical risks, this combination will drive a significant strengthening of the US dollar over the next 12 months. The only way for the USD index to drop would be a deterioration in macroeconomic data, which would resurrect the idea of federal funds rate cuts.
It must be said that the first scenario looks far more plausible. According to a Wall Street Journal insider, Donald Trump is considering the possibility of resuming full-scale military operations in the Middle East, though he currently favors diplomacy. White House officials believe that new strikes on Iran would spell the collapse of the deal struck with them. However, in my view, the current situation is much more conducive to an escalation of armed conflict than it was back in February.
Back then, the closure of the Strait of Hormuz was perceived as an apocalypse. Today, it’s clear that the oil market has adapted remarkably quickly, and flare-ups of geopolitical risk no longer trigger vertical spikes in Brent. Donald Trump hardly needs to worry about the North Sea grade surging to $150, let alone $200 a barrel. There is no question of a global economic crisis stemming from this.
At the same time, any escalation of the conflict in the Middle East will undoubtedly boost the US dollar as a safe-haven asset. Speculators’ bets on its rally look entirely justified.
However, the markets have figured Donald Trump out. He talks a lot but doesn’t actually do all that much—a complete contrast to Kevin Warsh. Which leaves us with one lingering mystery: how on earth did Warsh get the Fed Chairmanship from the hands of the US President?
