FX Daily: Kevin Warsh holds the keys to dollar resilience
The desk underscores that the resilience of the dollar is currently tethered to market expectations regarding Federal Reserve monetary policy, particularly in the wake of the new Chair Kevin Warsh's first meeting. Per the full note from ing-think, while the dollar has shown some strength, risks are increasingly tilted to the downside should the Fed's messaging diverge from prevailing market expectations. The influential role of the Fed's communication becomes crucial, especially with market anticipations pricing in a mere 21bps of tightening by December, considering both the recent dovish sentiment and the implications of the US-Iran deal that places further downward pressure on energy prices.
What the desk is arguing
The desk argues that the dollar's ongoing strength is highly contingent on the Fed's stance under Warsh, especially as it faces potential headwinds from several dovish signals. Per the full note, today's FOMC announcement functions as a critical moment to validate market expectations and could ultimately dictate the future trajectory of the dollar.
The focus rests on whether Warsh will align with the market's hawkish outlook or signal a dovish tilt that could undermine the dollar's recent performance. With factors such as Brent crude trading persistently below $80/bbl, the environment supports a narrative where any signs of dovishness from Warsh could swiftly lead to a dollar sell-off.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.1567, with a range indicating a high of 1.2000 and a low of 1.1200 by December 2026. Notable firm targets include deutschebank at 1.2500 and bofa at 1.2200 for the same date, suggesting a spectrum of views on the dollar's future.
This perspective aligns closely with firms like jpmorgan that are more optimistic, while some firms such as bofa currently hold a more bearish outlook, showing divergence in view.
How other firms see it
Aligned firms such as deutschebank and mufg also maintain bullish projections for the USD, reinforcing the narrative that growth expectations could support current dollar levels. Conversely, firms like bofa and rabobank espouse a bearish stance, suggesting potential weakness in the dollar outlook.
As part of the FX landscape, we also see the EUR/USD trajectory as influenced by positions taken by the ECB and their potential rate hikes, making it an ideal pair to monitor alongside Fed communications.
How firms align with this view
Key takeaways
- 01Dollar resilience is contingent on Fed Chair Kevin Warsh's communication and alignment with market expectations.
- 02Recent dovish developments, including the US-Iran deal, pose downside risks to the dollar ahead of the FOMC announcement.
- 03Market pricing currently factors in limited tightening from the Fed, creating sensitivity around any dovish signals.
- 04Expectations suggest the need for the Fed to validate market sentiment to maintain current dollar levels.
Market implications
Traders should watch for the next price point around 1.1500 in EUR/USD as a key level, while also keeping an eye on the FOMC announcement for signals that may propel the dollar's movement. Additionally, the balance of energy prices should inform positioning ahead of upcoming Fed communications.
Risks to this view
A divergence in Warsh's messaging from hawkish market expectations could catalyze a sharp decline in the dollar. Additionally, further positive developments in US-Iran relations, resulting in significantly lower energy prices could exacerbate the market's dovish sentiment.
Articles FX Daily: Kevin Warsh holds the keys to dollar resilience 07:51 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Brent is holding below $80/bbl after details of the US-Iran deal emerged, adding a dovish argument ahead of the FOMC announcement today. We think new Chair Warsh will match the market's hawkish expectations, but risks are on the downside for the dollar, whose resilience now seems to rely solely on Fed hike bets. The Riksbank hold may still sound a bit dovish Francesco Pesole , Frantisek Taborsky and Chris Turner New Fed Chair Kevin Warsh USD: Downside risks, but we expect Warsh to deliver Today’s FOMC announcement is a key test of the dollar’s recent resilience.
With Brent trading below $80/bbl after details of the US-Iran peace deal emerged yesterday, the greenback is increasingly reliant on expectations of Fed tightening this year. It therefore needs confirmation that policymakers – and especially new Chair Kevin Warsh – are seriously open to hikes, even as rates are almost certain to stay on hold today. If Warsh or the broader FOMC signal a stance that is clearly at odds with market pricing, the dollar would sell off sharply in our view.
But in our Fed preview , we argued that removing the easing bias from the statement and a cut from the median 2026 dot plot could be enough to keep the dollar firm. That is our baseline call for today: the Fed validating market expectations, and a broadly neutral impact on the dollar. At the same time, we admit the balance of risks does appear tilted to the downside for USD after the US-Iran deal announcement.
Softer energy prices strengthen the case for a dovish repricing, while the swap curve has so far remained insensitive to improved Middle East sentiment and still prices 21bp of tightening by December. Ultimately, the main dovish trigger may come from Warsh’s communication rather than the statement itself. He probably has little incentive to intentionally surprise on the dovish side and risk upsetting the bond market at his first meeting, but markets may overinterpret any nuance in his remarks as signalling a future dovish tilt.
Francesco Pesole EUR: Aiming for stabilisation EUR/USD resurfaced above 1.160 yesterday but is clearly awaiting cues from the Fed to leap in either direction. As discussed above, our call is neutral on the dollar today and, by extension, on EUR/USD. However, the inclusion of financial incentives for Iran in the peace deal (oil export resumption, economic development funds and asset unfreezing) does make the drop in oil prices look more sustainable, and therefore reduces downside risks for EUR/USD from here.
We expect consolidation in the 1.160-1.1650 area for now. One EUR-cross we are monitoring closely this week is EUR/GBP. That is trading slightly firmer this morning after May’s UK inflation surprised slightly on the downside.
Headline CPI was unchanged at 2.8% (consensus 3.0%) mainly due to muted food inflation and the core reading inched slightly higher to 2.6% (consensus 2.7%). Services CPI was, however, slightly hotter than expected at 3.7%. These figures don’t change our call for a 7-2 hold vote by the Bank of England tomorrow.
Risks however remain on the upside for EUR/GBP as 30bp of BoE tightening in the curve appears too hawkish, and some political risk premium may re-emerge after tomorrow’s by-election that is expected to pave the way for Andy Burnham to replace Keir Starmer as Prime Minister. Francesco Pesole SEK: Riksbank's hawkish room remains limited The Riksbank announces monetary policy this morning at 0930 CET, and we expect a hold at 1.75%, in line with consensus and pricing. As discussed in our preview , policymakers might try to strike a more hawkish tone while maintaining a wait-and-see stance to keep 2H26 hike pricing broadly intact and anchor inflation expectations.
But markets may struggle to embrace a less accommodative narrative as new projections will, in our view, fail to show CPIF inflation peaking above target or signal a rate hike already in 2026. We therefore see a neutral to mildly negative impact on SEK today. Still, the main driver of EUR/SEK has been crude, and we wouldn’t expect the pair to trade back above 11.00 purely on the nominal rate differential story.
We are mostly neutral on EUR/SEK this summer, with growth and rates differentials applying offsetting forces. We retain a preference for the downside into year-end, targeting 10.70. Francesco Pesole CEE: Market overshoots outpricing rate hikes Rates tried to continue Monday's rally yesterday, however we saw some pushback from the market and a reversal from intraday lows.
As we discussed here yesterday, especially in Poland, it seems the market has gone too far with the current pricing of only a 50% chance of a central bank rate hike in the one-year horizon. Although our economists expect rates unchanged as a baseline, we expect the market to want to keep some probability of rate hikes until we see more confirmation in the data. PLN saw some rally after more positive global headlines and a drop in oil prices.
On the other hand, the rate differential is increasingly pointing to a higher EUR/PLN somewhere around 4.260, the upper end of the current range. In Hungary today, the wage figures will be released, one of the last numbers before the National Bank of Hungary meeting next week. The baseline remains a 25bp rate cut for us with little chance of seeing a bigger move.
EUR/HUF is testing new lows below 350 which could be a trigger for the central bank to frontload easing. Frantisek Taborsky SEK Dollar CEE FX Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors Francesco Pesole FX Strategist Francesco is an FX Strategist and has been with the firm since May 2019. His main focus is on the G10 space and, in particular, on European and commodity currencies. He began his career at Credit… Frantisek Taborsky EMEA FX & FI Strategist Frantisek is an FX & FI Strategist covering EMEA markets, having joined the bank in 2022.
He provides short- and medium-term recommendations for ING's corporate and institutional client… Chris Turner Global Head of Markets and Regional Head of Research for UK & CEE Chris is Global Head of Markets and Regional Head of Research for UK & CEE. Together with his team, he provides short and medium-term FX recommendations for ING's corporate and… In this article USD: Downside risks, but we expect Warsh to deliver EUR: Aiming for stabilisation SEK: Riksbank's hawkish room remains limited CEE: Market overshoots outpricing rate hikes
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