Fed Chair Kevin Warsh’s strategy of delegating the function of monetary tightening to the Treasury bond market is increasingly being validated in practice. The aggregate of weak macroeconomic data effectively nullifies the prospects of monetary policy (MP) tightening in 2026. Against the backdrop of declining employment and slowing inflation, negative dynamics were also demonstrated by retail sales and the University of Michigan consumer sentiment index. The result has been a steady ascent of the EUR/USD pair, approaching the 1.1600 mark.The transformation of the Fed’s rhetoric from active forward guidance to passive market observation is becoming increasingly evident. At the most recent Federal Open Market Committee (FOMC) meeting, only three officials voted in favor of a federal funds rate hike, while the majority preferred a wait-and-see stance. This indicates an absence of deep ideological division or hostility toward the new Chair, contrary to Donald Trump’s claims. Nevertheless, the degree of internal consensus will be a key factor that investors closely evaluate when reviewing the minutes of the July FOMC meeting.
Subsequent data continues to confirm the trend of cooling in the US economy. Under such macroeconomic conditions, the Fed has the opportunity to refrain from tightening monetary policy, which perfectly aligns with the strategic interests of the White House. The Trump administration is consistently pushing for lower interest rates and, consequently, a weaker US dollar to support exports and broader economic growth.
The EUR/USD rally, accelerated by disappointing retail sales and consumer sentiment data, alongside a decline in the probability of a September Fed rate hike to 64%, could have been even more rapid. However, its momentum was restrained by the renewed rally in Brent crude prices. The North Sea grade rose amid a new escalation in the Middle East, specifically following Israeli retaliatory strikes on Lebanese territory in response to Hezbollah attacks.
The geopolitical situation in the region remains highly unstable, with no visible prospects for de-escalation. While the US is interested in a swift cessation of hostilities, Iran, where hardline factions have consolidated power, demonstrates a readiness for a protracted confrontation. For the Tehran leadership, the priority is not economic stability, but ensuring strategic deterrence and preventing any future strikes by the US-Israeli coalition.
The combination of slowing economic activity in the US and Brent crude prices holding within the $80–$90 per barrel range creates a fundamentally bearish scenario for the US dollar. Under these conditions, inflationary pressures will continue to ease, definitively removing any justification for Fed monetary tightening in 2026. Most likely, this is the consensus toward which Chair Kevin Warsh will guide the Committee.
The macroeconomic cooling in the US increases the probability of further euro appreciation. From a technical perspective, long positions in EUR/USD, initiated from the 1.1540 level, are recommended to be scaled up, provided the pair decisively breaks and holds above the 1.1585 resistance level.
