Investors are inclined to take Treasury Secretary Scott Bessent at his word regarding an imminent agreement with Iran. Expectations that the Strait of Hormuz will reopen and energy supplies will normalize have acted as a catalyst, driving Brent crude prices below the $80 per barrel mark. This reduction in the geopolitical risk premium has propelled the S&P 500 to fresh record highs and pushed US Treasury yields back to the levels observed prior to the July FOMC meeting. The resulting market environment has created ideal conditions for EUR/USD bulls.
Donald Trump’s strategic approach to monetary policy demonstrates a notable evolution. While his first-term appointment of Jerome Powell eventually drew heavy criticism, the figure of Kevin Warsh as Fed Chair appears far more adaptable to the White House’s objective of lowering interest rates. Initially, Warsh adopted a carefully calibrated “hawkish” posture. This maneuver effectively anchored inflation expectations and neutralized the resistance of hardline monetary tightening advocates within the FOMC.
However, at the current stage, the Fed Chair’s rhetoric is exhibiting a distinct dovish pivot. Warsh’s logic is predicated on market self-regulation: if Treasury yields rise, financial conditions tighten organically, rendering a Fed rate hike unnecessary. Conversely, if yields decline, the rationale for additional monetary tightening evaporates. Market participants have quickly internalized this paradigm, prompting a repricing of rate hike probabilities. This downward adjustment in expectations has immediately placed downward pressure on the US dollar.
The derivatives market’s reaction to Scott Bessent’s optimistic statements was swift. The implied probability of a federal funds rate hike in September has fallen from 67% to 57%, while the odds of two tightening cycles in 2026 have dropped from 44% to 37%.
Nevertheless, US monetary policy is formulated collegially, and the Chair’s influence has its limits. A significant contingent of hawks remains within the FOMC. For instance, Kansas City Fed President Jeff Schmid—were he a voting member this cycle—would likely emerge as a fourth dissenter advocating for a rate hike. He considers the current stance of monetary policy insufficiently restrictive and supports the need for further tightening, highlighting substantial internal friction within the central bank.
Ultimately, macroeconomic data will remain the primary determinant of the interest rate trajectory—precisely the outcome Kevin Warsh desires. An improvement in labor market metrics could restore the initiative to the US dollar. Nonfarm payrolls are projected to accelerate from 57,000 to 85,000 in July, while the unemployment rate is expected to hold steady at 4.2%.
Despite the favorable fundamental backdrop, the EUR/USD rally has been remarkably muted, signaling that investors are adopting a wait-and-see approach ahead of the US labor market data release. It is highly probable that the euro will consolidate within the 1.1500–1.1565 range in the near term. False breakouts of this channel’s boundaries, followed by a price reversal, will likely be interpreted as technical signals to initiate either short or long positions.
