Trust takes a minute to lose and years to rebuild — yet Kevin Warsh, by all accounts, has managed it. He has convinced the market that the Fed intends to fight inflation until it is fully vanquished. Added to expectations of further rate hikes is another pillar of dollar strength: a renewed appetite for US assets. How else to explain EURUSD diving in lockstep with a confident S&P 500 rally and falling Treasury yields?
Investors are focused on two stories. The first is the US–China leaders’ summit, which offers hope that Washington and Beijing will not stymie the development of artificial intelligence — a direct tailwind for the S&P 500. The second is Saudi Arabia’s ability to restore oil flows to previous levels: on this news, Brent has fallen for a fourth straight session, the longest losing streak in three months, giving equity indices their own tailwind.
The dollar, meanwhile, is monetizing the thesis of “American exceptionalism”: capital is flocking to US-issued assets like bees to honey. At the same time, conviction in continued Fed tightening is growing: futures markets now price a 55% probability of another move by October, and the odds of two tightening steps in 2026 have jumped from 28% to 43% over the past week.
The catalyst has been openly hawkish rhetoric from FOMC officials. Chicago Fed President Austan Goolsbee acknowledged that the regulator’s response to persistent supply shocks will come at a steep cost to the US economy. His St. Louis Fed colleague Alberto Musalem went further: if the tightening cycle is interrupted, inflation will remain above the 2% target, meaning a federal funds rate hike is not an option — it is a necessity.
Money is flowing into US assets, and it is most likely leaving Europe, where political risks are mounting. The failure of Friedrich Merz’s party in regional elections has put the question of a chancellor change squarely on the table. The logic is simple: if Britain’s swap of Keir Starmer for Andy Burnham at the helm of the government and the Labour Party only added to the ruling party’s political capital — with recent polls showing it now ahead of Nigel Farage’s Reform UK — then why shouldn’t Germany try the same trick?
And if the Fed cannot outpace the ECB in the speed of policy tightening, the capital migration into US assets alone becomes a verdict for EURUSD — a verdict that risks growing even harsher if fresh S&P Global business activity data reinforce the American exceptionalism thesis.
Meanwhile, the bulls’ inability to mount a counterattack and storm the resistance at 1.1495 speaks eloquently to their weakness and allows us to continue holding short positions toward the previously stated targets of 1.14 and 1.13.
