Kevin Warsh navigates a hawkish Fed shift
The desk posits that the changing tone from the Federal Reserve, now led by Kevin Warsh, signals a potential shift toward future rate hikes amidst growing economic momentum and inflationary pressures. As outlined in the source commentary, the Fed Chair seems disinclined to provide explicit forward guidance, which creates uncertainty in market pricing for rate adjustments. The consensus for rate hikes has intensified, with a 25bp increase already priced in for this year, as inflation rates are reported at a three-year high of 4.2%. Per the full note source, this evolving landscape offers a complex, albeit hawkish, backdrop for major currency pairs like EUR/USD and USD/JPY going into the latter half of the year.
What the desk is arguing
The desk believes that Kevin Warsh's leadership at the Federal Reserve may lead to a substantial pivot toward tighter monetary policy as inflation remains elevated and economic growth appears resilient. Per the full note source, Warsh's reluctance to embrace forward guidance may create unpredictable dynamics as markets price in the likelihood of further rate hikes.
Rising inflation figures underscore this sentiment, with recent data indicating a 4.2% inflation rate, the highest in three years. Concurrently, optimism surrounding economic growth suggests a GDP increase of approximately 2-2.5% as job additions and record highs in equity markets bolster overall sentiment. This environment naturally fuels expectations for additional rate hikes, already reflected in market positioning.
Where it sits in our coverage
Currently, for the EUR/USD pair, the desk notes a consensus target of 1.1717 for March 2026, with forecasts varying significantly among firms, including deutschebank at 1.1800 and goldman at 1.2100.
The desk's forecast aligns closely with our coverage at the lower end of the range. As expectations for rate hikes grow amid high inflation, current pricing may underestimate the scale of potential Fed actions, suggesting we could see a shift in the consensus moving forward.
How other firms see it
Several firms, including bofa and dansekbank, share a more hawkish outlook, indicating they expect further strengthening of the USD. Meanwhile, firms such as citi seem to diverge significantly from this angle with lower targets for the EUR/USD pair.
The fluctuations in the EUR/USD trajectory appear influenced by the Federal Reserve's stance on rate hikes, which could reverberate throughout other currency pairs, particularly USD/JPY and GBP/USD, as they also react to shifts in US monetary policy.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Federal Reserve under Kevin Warsh may transition toward a more hawkish stance via prospective rate hikes.
- 02Inflation has reached a three-year high, prompting notable market expectations for tighter monetary policy.
- 03With consensus targets varying across firms, the desk's lower-end forecast for EUR/USD may reflect underestimating future Fed actions.
- 04Expect greater volatility in currency pairs like USD/JPY and GBP/USD as markets adjust to evolving Fed signals.
Market implications
Traders should closely monitor the EUR/USD reaction as market positioning shifts towards the Fed's anticipated actions. The prevailing inflation rate and labor market indicators will serve as crucial signals for the timing of any potential rate hikes, especially if inflation continues to breach current levels.
Risks to this view
A reversal in this outlook could materialize if inflation falls unexpectedly, allowing for speculation around potential rate cuts, contrary to the current market positioning. Additionally, geopolitical developments, particularly in the Middle East impacting energy prices, could derail economic momentum and subsequently monetary policy trajectories.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bearish | 1.1200 |
ANZ | Bearish | 1.1400 |
UOB | Bullish | 1.1565 |
Articles Kevin Warsh navigates a hawkish Fed shift 15:12 FX Rates United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Improved economic momentum and elevated inflation suggest the Federal Reserve will acknowledge the possibility of future rate hikes via new forecasts. New Chair Kevin Warsh isn’t a fan of forward guidance though and will likely remain non-committal in his first press conference James Knightley , Padhraic Garvey, CFA and Chris Turner We doubt that new Fed Chair Kevin Warsh will vote for a rate cut, despite Trump's demands for lower rates Inflation and regained momentum swing hawkishly Optimism is rising that we are inching closer to a deal to reopen the Strait of Hormuz, but even with a deal, global energy prices will likely remain elevated until at least early 2027. European and Asian inventory rebuilding will keep a strong bid in markets through the second half of the year.
At the same time, uncertainty over the scale of damage to infrastructure in the region and the willingness of shipping companies to put their vessels back potentially into harms way, should the deal subsequently fail, limits supply. In consequence, we expect no real relief from higher prices this year. The US economy is more insulated from Middle East risks than most countries due to its energy independence, but it is not immune.
An abundance of natural gas and a lack of storage mean domestic prices have fallen, which is helpful for keeping utility bills in check. However, higher motor fuel costs are adding to cost pressures with spillover effects already in freight rates and airline fares, with inflation breaching a three-year high of 4.2%. Amid rising inflation, business surveys point to 2-2.5% GDP growth, the economy is adding jobs and equity markets are at record highs.
Understandably, market expectations of potential Federal Reserve rate hikes have increased, with a 25bp rate hike priced in this year and around a 50% chance of a second such move next year. Unanimous vote for stable rates In terms of Wednesday’s FOMC meeting, we expect the Fed to leave monetary policy unchanged, but we do expect a statement that puts greater emphasis on the possibility of an interest rate rise. Remember that last time, Stephen Miran, who has since vacated his governor position for newly appointed Fed Chair Kevin Warsh, voted for a rate cut while three other FOMC members – Beth Hammack, Neel Kashkari and Lorie Logan – wanted the removal of the perceived “easing bias”.
The minutes to the meeting subsequently suggested more officials were uncomfortable with the language of the statement, and so we expect to see a unanimous vote in favour of keeping policy unchanged, but with a hawkish shift on language. With Miran gone, we doubt that Kevin Warsh will choose to dissent against all the other 11 members by voting for a rate cut, despite his appointment as chair by a president who has demanded lower rates. ING's expectations for the Federal Reserve's central projections Source: Federal Reserve, ING "> Source: Federal Reserve, ING In the press conference, he will likely acknowledge that economic conditions do not justify rate cuts at this time.
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