Financial markets live by the “shoot first, think later” principle. An extremely volatile reaction is inevitably followed by a pullback as emotions cool off. The steepest three-month drop in EURUSD was the result of traders interpreting Kevin Warsh’s rhetoric as blatantly “hawkish.” Dollar bulls enthusiastically embraced the fact that 16 out of 18 FOMC members factored at least two rate hikes in 2026 into their updated projections. But what happens next?The futures market is virtually certain of a federal funds rate hike to 4.5% and assigns a better-than-even chance (over 50%) of it reaching 4.75% over the next twelve months. Meanwhile, the FOMC’s consensus projection for 2027 remains unchanged at 4.125%, identical to the 2026 forecast. This implies just one more tightening step, most likely in December, followed by a prolonged pause. Admittedly, Fed policy is data-dependent and things could change, but for now, speculators are clearly getting ahead of the curve.
Does this mean the EURUSD decline has run its course? Not at all. The euro is currently being supported by falling oil prices and a rally in equity markets, which is fueling global risk appetite and putting pressure on the dollar as a safe-haven asset. On top of that, market participants are pricing in another three to four policy tightening steps from the ECB. Nevertheless, the specter of an energy crisis and mounting political risks in France and Germany will keep the European currency’s gains in check.
Furthermore, the very fact of this massive repricing of expectations is critical for the market. At the start of the year, investors were expecting rate cuts; by mid-year, they had priced in a modest hike; and now, they are betting on an acceleration of the monetary tightening cycle. Under these conditions, the trend of unwinding speculative net long dollar positions risks reversing entirely.
The restoration of confidence in the Federal Reserve is also playing into the greenback’s hands. The rate hike and Kevin Warsh’s tough rhetoric have achieved what Scott Bessent’s bond buyback program could not—they have driven down government bond yields. The market now believes the central bank will fight inflation to the bitter end, which has restored interest in US assets, including Treasuries. And in this battle, the dollar is coming out on top.
Given all this, the technical pullback higher in EURUSD is likely to prove nothing more than a temporary breather. Emotions will subside, but the fundamental drivers—the continuation of the monetary tightening cycle and the return of confidence in the Fed—will sooner or later unleash the EURUSD bears back onto the market.
