USD: Warshspeak + yen shock steepen dollar reset
Call it Warshspeak, the new Greenspeak. Alan Greenspan made central-bank ambiguity famous by saying enough to shape expectations, but not enough to lock policy into a fixed path. Kevin Warsh is taking that idea in a more volatile direction, with less forward guidance, fewer road signs and more responsibility pushed onto market pricing and incoming data. That gives the Fed more flexibility, but it also makes every inflation, jobs and growth report between now and September more important.
The Fed held rates, and Warsh gave markets plenty of process but little guidance. He defended the 2% inflation target, praised the economy’s resilience and pushed back against the idea that no guidance amounts to confusion. Yet investors left without a clear answer on why the Fed paused, what would trigger a September hike or what he plans to say at Jackson Hole.
For the US dollar, the missing signal became the signal, especially after positioning had become stretched into the meeting. The front end rallied, the dollar fell and compounded by a sharp yen rally that looked consistent with FX intervention by Japanese authorities, the DXY has now dropped about 1.5% over two days, erasing its July gains and marking its worst two-day decline since April 2025.
The curve reaction tells the bigger story. Three hawkish dissents exposed the “family fight” inside the FOMC, and the lack of guidance pushed that debate into the yield curve. The front end rallied on no hike and no near-term signal, while the long end pushed back against inflation-credibility risk. That kind of steepening is unusual at a meeting where the Fed move is a no move.
Yesterday’s macro data added more nuance than direction. Q2 GDP slowed to 1.5%, weighed down by a wider trade deficit and falling inventories, but the underlying details looked stronger than the headline. Real final sales to domestic purchasers rose 2.2%, while final sales to private domestic purchasers jumped 3.9%, helped by a resilient 3.2% gain in consumer spending and a 7% rise in private fixed investment. That suggests the economy absorbed the first energy shock better than feared, even with elevated prices through much of the quarter.
The inflation side gave the doves something to lean on. The PCE price index fell 0.1% in June, while core PCE rose just 0.1%, below expectations and enough to cut the implied probability of a September hike from roughly 70% on Wednesday to around 60%. Our baseline remains no hike this year, but September now looks closer to a coin flip than a hold. Warshspeak may give the Fed room to maneuver, but with growth still firm and inflation cooling only gradually, the next data print can quickly become the next policy shock.
EUR: Marching through one-month highs
EUR/USD has extended its post‑Fed recovery, pushing back above 1.15 as broad dollar weakness gathers momentum. While the initial catalyst was the Fed’s less hawkish-than-feared message, the latest leg higher has been driven by a sharp decline in USD/JPY, which has weighed heavily on the dollar more broadly.
The move has also been helped by falling US real yields. Lower short‑dated real rates have provided a clear boost to EUR/USD, while the near 9% decline in Brent crude this week has eased some of the energy-related concerns that had weighed on the eurozone outlook throughout recent months.
Encouragingly for the euro, the macro backdrop has held up better than many expected. Eurozone GDP expanded by 0.4% q/q in Q2, the strongest pace since early 2025, suggesting the region has absorbed the recent energy shock relatively well. Inflation data released today is expected to reinforce that resilience. With German and Spanish figures already surprising to the upside, a eurozone CPI print near 2.9% would support market expectations for further ECB tightening, with around 1½ additional hikes still priced by year-end.
That said, the recent rally still appears to be driven more by the USD leg than the EUR leg. Long-dollar positioning had become heavily stretched ahead of the Fed meeting, and the lack of a more hawkish signal has forced some investors to unwind those positions. As a result, any upside surprises in eurozone data are currently having an amplified impact on the single currency.
Looking ahead, if the Fed ultimately refrains from hiking in September, EUR/USD could be on course to finish Q3 closer to 1.17. For now, however, the pair is likely to remain driven by incoming data and shifting Fed expectations rather than a fundamentally stronger euro story.
GBP: BoE leaves rates unchanged, sterling little changed
The Bank of England left rates unchanged at 3.75%, with a 6-3 vote split, broadly in line with expectations. The usual hawks, Pill, Greene and Mann, voted for a hike, while the swing voters, Bailey, Lombardelli and Ramsden, joined the more dovish members in opting to hold.
Sterling barely budged, while short-end gilt yields fell by as much as 12bps. Market pricing for a September hike dropped from around 60% before the meeting to roughly 30% afterwards.
The balance of risks looks much the same as it did in June. Elevated oil prices continue to tilt inflation risks to the upside, while the labour market remains soft. That said, Andrew Bailey was keen to push back against the idea that the MPC is gradually edging towards a hike.
Looking at the Bank’s projections, one detail stands out. In its April forecasts, inflation was expected to average 3.1% in Q2 2026 even under the mildest scenario (Scenario A), and to remain above 3% in subsequent quarters. In reality, Q2 inflation averaged just 2.8%.
Yesterday’s revised projections point to a somewhat softer inflation outlook than those published in April. Even so, UK inflation is still expected to peak at 3.2% in Q4 2026, suggesting a hawkish undertone that, while muted, is likely to persist. We continue to view this as a “hawkish hold” extending through 2026.
Overall, sterling’s support from rates will hinge on developments in the Middle East and the direction of oil prices. July’s inflation print is likely to capture the resurgence in oil prices following the re-escalation of the conflict, keeping BoE hawks in the driver’s seat and limiting any downside in sterling for now.
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Calendar: July 27-31
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