The market was looking for confirmation that the federal funds rate hike from 3.75% to 4% would mark the beginning of a new tightening cycle, and Kevin Warsh did nothing to dissuade them. As a result, the US dollar recorded its best daily rally in three months. A strengthening of the greenback on this scale was last seen following the June 17 Fed meeting. Once again, we see a “hawkish” tone from the Fed Chair and identical expectations of monetary policy tightening. It is nothing short of déjà vu.
A robust economy, stubborn inflationary pressures showing no signs of improvement, and a complex geopolitical landscape formed the foundation for the FOMC’s unanimous decision to raise rates. Kevin Warsh’s remarks that the Fed had merely removed “one dose” of monetary stimulus and was now taking the persistence of inflation seriously only added fuel to the EURUSD sell-off. The emphasis on “one dose” (rather than reversing all the borrowing cost cuts of 2025) and the phrase “getting serious” were interpreted by the market in one clear way: the tightening cycle has officially begun.
This rhetoric was directly reflected in the updated macroeconomic projections. Sixteen out of 18 FOMC members anticipate at least one federal funds rate hike in 2026, with four of them forecasting two additional tightening steps. The futures market reacted instantly: the probability of a rate hike in October jumped to 50%, and to 88% for December. The odds of two consecutive monetary policy tightening steps increased from 30% to 38%.
The Fed’s demonstrated resolve in fighting inflation also had a beneficial impact on the government bond market. Yields on 10-year Treasury notes stabilized, and the sell-offs driven by a crisis of confidence in the central bank subsided. Investors are now convinced that Kevin Warsh will not dance to Donald Trump’s tune. It does not matter how many times the President reiterates that US rates should be at 1% or lower, or how often the White House labels the Fed’s tightening decisions as a failure.
The restoration of confidence in the Federal Reserve, US Treasuries, and the American dollar became a trigger for the EURUSD plunge just as powerful as the actual start of the monetary tightening cycle. Futures markets are now pricing in three more Fed rate hikes over the next 12 months. For comparison, the market expects four hikes from the ECB and five from the Bank of England.
Looking at historical parallels, after the June meeting, the greenback continued to strengthen for a while before eventually weakening amid a de-escalation of tensions in the Middle East. Should we expect this scenario to repeat? The answer lies entirely in the realm of geopolitics.
From a trading perspective, short EURUSD positions opened at 1.164 and averaged down at 1.1555 have fully justified themselves. The target levels of 1.1505 and 1.1465 have been successfully reached, but the potential for further selling remains intact. New profit-taking targets are now set at 1.14 and 1.13.
