EUR/USD: K Warsh is in a delicate position

In the span of just a few trading sessions, the scenario of a Federal Reserve rate hike today has shifted from a merely plausible hypothesis to a near-certainty for the market.

Factors driving this shift include inflation fears linked to AI and the renewed conflict in the Middle East, a particularly strong federal jobs report for August, and - most recently, on Friday - consumer price data that failed to offer reassurance.

Tune in at 20:00 (EU time) for the monetary policy decision itself, the revised growth and inflation forecasts, and - above all - the "dot plot," that famous chart published four times a year. The concept is simple: each voting board member provides their interest rate projections for upcoming policy meetings.

Jeff Schulze, Head of Economic and Market Strategy at ClearBridge Investments (a Franklin Templeton subsidiary), anticipates "a 25-basis-point rate hike to the 3.75-4.00% range at today's FOMC meeting, driven by the recent surge in oil prices, a robust jobs report, and persistently high inflation figures for August."

"A rate hike would reinforce Chairman Warsh's shift toward a more restrictive stance since Jackson Hole, bolstering his credibility in the fight against inflation and underscoring his independence from the administration."

The interest rate environment remains particularly strained, set against the backdrop of a diplomatic and military crisis in the Middle East that is pushing crude oil prices higher. This week, the yield on the US 10-year Treasury note crossed the symbolic 5% threshold, reaching its highest level since 2006.

On Tuesday, Saudi Arabia vowed to respond "firmly" following fresh attacks on its territory by Yemen's pro-Iranian Houthi rebels. In recent days, the Houthi movement has dealt significant setbacks to Yemeni government forces and their Saudi ally, targeting the Kingdom's oil infrastructure and - following a lightning offensive - strengthening its grip on the Bab el-Mandeb Strait.

"And for the coming months, the risks are clearly skewed to the upside. Food inflation remains moderate at 2.5% year-on-year, but rising agricultural commodity prices could push it toward 4% by 2027. Meanwhile, energy prices are hitting new highs, while Iran continues to rely on its regional proxies to ramp up pressure on the United States ahead of the midterm elections. Food and energy are thus continuing to stoke the fires of inflation," explains Kevin Thozet, a member of Carmignac's investment committee.

"Kevin Warsh has painted himself into a corner. After a decidedly hawkish inaugural speech, he adopted a more dovish tone in July, triggering a rise in long-term interest rates. Repeating that scenario after his Jackson Hole speech would seriously undermine his credibility - and, by extension, that of a monetary institution with a history spanning more than a century."

Last week, the ECB raised its key interest rate to 2.5%. "Overall, the updated projections sent a 'hawkish' signal, with upward revisions to both headline and core inflation for 2027 and 2028. Christine Lagarde highlighted that economic activity had proven more resilient than expected, while inflation - particularly food inflation - had been lower than anticipated. However, the ECB now believes that inflationary pressures will persist for longer. ECB staff also released three alternative scenarios: moderate, adverse, and severe," commented Nadia Gharbi, Senior Economist at Pictet Wealth Management.

On the data front, investors received the ZEW economic sentiment index for Germany - the EU's largest economy - on Tuesday. The barometer remained virtually unchanged at 3.3, whereas the financial community had expected a significant rise.

"The ZEW economic sentiment indicator remains stable. Experts show cautious optimism regarding the economic recovery. Growth continues to be supported by fiscal measures and bolstered by export dynamics. However, significant risks remain: persistently high energy prices - a consequence of the ongoing war in Iran - and heightened uncertainty stemming from hybrid attacks are weighing on the economy," comments Professor Achim Wambach, President of the ZEW Institute.

Right now, the pair is trading at $1.15362.

KEY TECHNICAL FACTORS
Following a period of sideways movement, the downward volatility observed and measured today indicates a breakout direction that allows us to resume our short positions.