The Federal Reserve under Kevin Warsh is shifting to a new operating mode: “less talk, more action.” The Fed chair clearly doesn’t want to blush over his own promises, and in such conditions, market attempts to detect a rift within the FOMC through the June meeting minutes are akin to reading tea leaves. Most likely, the document will be cut just as radically as the accompanying statement. Such is the new reality, and it is precisely this that sustains the uncertainty playing into the hands of the US currency.
However, things are not so straightforward. It would seem that the reduced probability of monetary tightening following Warsh’s softer rhetoric in Sintra and disappointing labor market data should have sent the greenback into a deep knockout. The dollar indeed posted its worst weekly performance since April, but it still managed to find the strength to stabilize. For the EUR/USD rally to continue, there needs to be a further deterioration in the chances of rate hikes, and this can only happen against the backdrop of dismal macroeconomic statistics. Are you ready to bet your bottom dollar that this is exactly what will happen?
Of the six G10 currency-issuing central banks whose meetings are scheduled for July, only the Reserve Bank of New Zealand has higher chances of raising rates than the Fed. The ECB, Bank of England, and Bank of Japan will most likely take a pause. Not to mention Canada. Overall, according to Bloomberg forecasts, due to the Middle East conflict and colossal spending on artificial intelligence technologies, borrowing costs will turn out higher than expected before the Iran bombings.
Judge for yourself: it was previously forecast that the federal funds rate would drop by 100 basis points by mid-2027. Now, only a 25 bps cut is expected. The longer the period of holding rates at elevated levels, the more attractive US assets become, and the stronger the US dollar.
This circumstance is forcing asset managers and major banks to abandon the greenback as a funding currency in carry trade operations. Speculators are increasingly using the yen and euro to play interest rate differentials against emerging market currencies. This fundamentally changes EUR/USD‘s reaction to stock index dynamics and the associated shift in global risk appetite. If previously the pair confidently rose amid an S&P 500 rally, now it will think three times before repeating this scenario.
That said, it was precisely the US stock markets closed ahead of Independence Day that allowed EUR/USD to stabilize. The US dollar caught its breath against the backdrop of absent major news and began preparing for a new round in the battle for global dominance.
