EUR/USD falls sharply on Friday, trading near 1.1595 and down around 0.48% as the US Dollar strengthens following Federal Reserve Chair Kevin Warsh’s speech at the Jackson Hole Symposium. His emphasis on price stability has prompted markets to significantly increase expectations for a September interest-rate hike.
Warsh stressed that the Fed needs convincing evidence that underlying inflation is moving sustainably toward its target. He warned that policymakers still “have work to do” if inflation fails to make sufficient progress. He also argued that current financial conditions may not be particularly restrictive, noting that credit and lending markets show limited signs of monetary policy restraint.
Although Warsh acknowledged that recent summer inflation data had been better than expected, he said the improvement was not enough to convince him that underlying inflation trends had materially changed. He reiterated that the Fed’s 2% PCE inflation target remains firm, reinforcing expectations that monetary policy could stay restrictive for longer.
Warsh also offered an optimistic assessment of the US economy. He highlighted healthy consumer spending, a stable labor market and rapidly increasing business investment, suggesting that economic conditions may provide room for the Fed to maintain a tighter policy stance.
His comments triggered a major repricing of interest-rate expectations. CME FedWatch data showed the probability of a September rate hike rising to approximately 57%, compared with around 36% before his speech. The shift provided strong support for the Greenback, pushing the US Dollar Index approximately 0.44% higher to 99.55.
Meanwhile, US economic data delivered mixed signals. The latest BLS benchmark revision lowered estimated nonfarm employment by 79,000 jobs, or 0.1%, over the 12 months through March. The relatively small adjustment was less severe than last year’s much larger downward revision.
The University of Michigan Consumer Sentiment Index was revised slightly higher to 51.7, while one-year inflation expectations eased to 4.0% from 4.3%. Despite these softer inflation expectations, Warsh’s hawkish stance remains the dominant driver of EUR/USD.
Trade idea: EUR/USD remains bearish below 1.1650; selling rallies toward 1.1610 could target 1.1530, while a break above 1.1660 would weaken the bearish setup.
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