The reality of macroeconomic data is coming into direct conflict with market expectations. The US labor market is showing signs of significant cooling, comparable to late 2025, when the Fed executed three rate-cut cycles. Under such conditions, rhetoric about monetary tightening appears untenable: over the past six months, average employment growth has been a mere 44,000 jobs per month, and in July, the figure actually contracted by 23,000. Coupled with downward revisions to the May and June data, this release triggered a significant correction in financial markets, pushing the EUR/USD pair to its highest levels since June 17 (the period of Kevin Warsh’s initial “hawkish” rhetoric).
The market’s perception of the Fed Chair has undergone a qualitative shift. Warsh’s concept that financial conditions can be tightened organically through rising Treasury yields is in direct conflict with the actions of the US Treasury, which is actively interested in lowering borrowing costs. Moreover, while Kevin Warsh insists on continuing quantitative tightening (QT) and shrinking the Fed’s balance sheet, the Treasury is exploring options to expand it to finance currency interventions.
The combination of these contradictions, compounded by reports of regular consultations between Donald Trump and the Fed Chair, as well as renewed pressure from the White House aimed at ousting Lisa Cook, is fostering persistent doubts about the central bank’s institutional independence. This factor has become the key driver behind the massive unwinding of speculative long positions in the US dollar.
The disappointing labor market data has logically cooled “hawkish” sentiments within the FOMC. The derivatives market swiftly adjusted its expectations: the probability of holding the key rate unchanged in September surged from 33% to 53%, exerting severe downward pressure on the US currency.
Nevertheless, EUR/USD bears quickly regained their footing by focusing on the internal contradictions within the macroeconomic statistics. Despite the slowdown in job creation, which is characteristic of recessionary trends, the unemployment rate continued to decline in July, reaching 4.1%. This divergence in indicators allows the Fed to maintain its focus on inflation, as previously stated. In this context, the upcoming July Consumer Price Index (CPI) release has the potential to trigger no less volatility than the recent NFP report.
Additional fundamental support for the dollar is being provided by Iran’s maximalist demands. Recognizing the Trump administration’s desire for de-escalation in the Middle East amid declining Republican Party ratings, Tehran has shifted to a tactic of testing the limits of Washington’s patience. The Islamic Republic is demanding billions in reparations for the alleged violation of June agreements, the complete withdrawal of US troops from the region, and the lifting of the blockade on the Strait of Hormuz. Such rhetoric significantly increases the risk of imminent military escalation.
As long as geopolitical tensions in the Middle East persist, the US dollar retains chances for a recovery. The technical strategy of returning EUR/USD quotes to the 1.1500–1.1565 consolidation range has successfully played out. Any further escalation of geopolitical risks will create favorable conditions for building short positions in the euro. Conversely, should the situation stabilize, there is a high probability of sideways consolidation within the 1.1540–1.1600 channel until the release of US inflation data.
