Traders should be used to the fact that markets periodically turn everything upside down. Even central bankers acknowledge this. According to FOMC member Christopher Waller, the risks facing the Fed have completely flipped over the past year. If cooling labor markets forced rate cuts in the second half of 2025, the priority now is bringing inflation back to target. How quickly the Federal Reserve does this is critical for EUR/USD.
Fresh ISM services activity data confirmed the words of the senior official. The headline number missed expectations but remained in expansion territory. However, the devil is in the details: the fastest rise in the employment component since 2024 and the drop in the prices component below 70 for the first time since February clearly prove Waller right. The labor market has stabilized, and the Fed can now focus on fighting inflation.
The derivatives market remains almost certain of a 25 basis point federal funds rate hike in 2026. The probability of this outcome is estimated at 76%. The odds of two acts of monetary tightening stand at 34%. Investors believe the Fed will act more aggressively than other central banks, allowing speculators to build record net longs in the US dollar since 2015.
According to Monex, much of the greenback’s strength comes from the rates narrative. I fully agree with this. There are, of course, factors of American exceptionalism and demand for safe-haven assets—especially given that the Islamic Revolutionary Guard Corps continues to attack tankers in the Strait of Hormuz. However, the US will predictably say that no one was harmed and there is no escalation of the Middle East conflict. At the same time, the acceleration of the European economy will narrow the GDP growth differential and reduce the impact of American exceptionalism.
Indeed, the EUR/USD collapse in late June was the result of a reassessment of the Fed’s position. At the end of 2025, it was easing monetary policy, and with Kevin Warsh’s arrival, investors felt the central bank would tighten it—and do so aggressively. Gradually, the markets realized they had gotten ahead of themselves, and the euro recovered some of its losses.
Will the minutes of the June FOMC meeting provide a hint? If the text is trimmed in a similar way to the accompanying statement, it might suggest that Kevin Warsh will do everything reluctantly—including raising rates. And that would be another stone in the American dollar’s garden.
