Warsh Shuffles the Deck: Washington Takes Charge

The macro point

The foreign exchange market is experiencing a shift. In recent weeks, attention has been divided between geopolitics in the Middle East and the ECB's return to rate hikes. This week, one player took center stage: the Federal Reserve. One meeting was enough for the greenback to regain ascendancy over all major currencies. How could a mere status quo on rates cause such a movement? The answer lies in one name.

Kevin Warsh held his first meeting at the head of the Fed on June 17. Rates didn't change—maintained at 3.50-3.75%, as expected—but the projections spoke: nine committee members now anticipate a hike by the end of 2026. Warsh especially abandoned the traditional "forward guidance," explaining that markets function better when they react to data rather than the central bank's words. The wink is telling: appointed by Donald Trump to lower rates, the new president signaled the exact opposite.

The result was immediate. The dollar rose across the board. Following the meeting, the EUR/USD plunged to 1.1418, its lowest since March, before recovering to close the week at 1.1467, down about 1%. Strong US retail sales (+0.9% in May) reinforced the movement. The mechanism is clear: the less the Fed guides the market, the more every U.S. statistic becomes explosive. Volatility, lately subdued in Forex, could well resurface.

The ECB, for its part, has not disarmed. After raising its deposit rate to 2.25%, it maintains a firm stance: Pierre Wunsch mentioned a possible hike as early as July, and the market is still betting on another hike by fall. Enough to support the euro but not enough this week to withstand the tidal wave from Washington. When two central banks are restrictive, the one that surprises the most moves the rates. This time, it was the Fed.

Should we then bet unreservedly on the greenback? Several analysts believe that the market now prices a probability too high of Fed rate hikes. The de-escalation between the United States and Iran also takes away one of the dollar's geopolitical supports. J.P. Morgan even sees the EUR/USD rising towards 1.17 this summer before falling again.

Technical point

This week, the main driver of major pairs comes down to two words: interest rate differential. It's this, revived by the Fed, that explains most movements—with one exception, the Canadian dollar, tied to oil.

The greenback is the big winner of the sequence. The pair closes at 1.1467 after hitting 1.1418, the lowest point since March. The 1.1410-1.1500 zone is the immediate battlefield: a clear break below 1.1400 would open the way to 1.1300, while reclaiming 1.1570 then 1.1670 would suggest a credible rebound. The momentum remains dollar-oriented as long as Warsh lets the threat of a hike loom, but the ECB's tightening expectations should cushion the euro's fall. Thursday's PCE will be the arbiter.

The Swiss franc and yen, usual safe havens, are the first to be penalized by the yield premium. The EUR/CHF is rising towards 0.9261: the franc remains sought after, but the widening rate differential in favor of the euro area caps its potential. The EUR/JPY trades around 184.90, within a range of 184.4 to 186.3: this week's Bank of Japan rate hike wasn't enough to reverse the trend, the differential remaining too unfavorable to the yen. Only a fresh geopolitical surge would return these two currencies to their safe-haven roles.

Canadian dollar and British pound: the EUR/CAD hovers around 1.6230, close to its yearly highs. The pound lacks its own direction: the EUR/GBP evolves around 0.8671, without a marked direction, the sterling mainly following the dollar and euro's variations.

The supports and resistances shown below indicate the lows and highs within which rates should evolve during the week.

Announcements to follow

The week promises to be dense and focused on inflation. After Warsh's speech, the market will scrutinize every U.S. data with increased attention, and that's precisely the effect sought by the "new" Fed. The central appointment falls on Thursday with the PCE, the central bank's preferred inflation indicator. A figure above expectations (consensus around +3.4% year-on-year for the core, +0.5% on the month for the overall PCE) would boost the dollar and strengthen the scenario of a rate hike by December.

Before that, Tuesday's flash PMIs from Germany, the Eurozone, the UK, and the US will set the tone for activity. European markets have recently held up better, supported by declining energy: these indices will say if the optimism is justified. In the background, the People's Bank of China's decision and Canadian inflation (Monday), then Australian employment figures and Japanese inflation (Thursday) complete the picture.

The information presented in this publication is communicated to you for informational purposes only and does not constitute investment advice, a sales offer, or a solicitation to purchase, and should in no way be the basis or considered as an incitement to engage in any investment whatsoever.