EUR/USD Holds Near 1.1600 as Warsh’s Hawkish Message Supports Dollar

Key Takeaways

• EUR/USD traded near 1.1590 on Monday after falling below 1.1600 following Fed Chair Kevin Warsh’s Jackson Hole speech.
• Warsh reaffirmed the Federal Reserve’s 2% inflation target and signalled that further policy tightening remained possible if underlying inflation failed to improve.
• July’s PCE price index rose 0.2% month on month and 3.7% year on year, reinforcing concerns that US inflation remains too high.

EUR/USD struggles to recover from Friday’s decline

The euro remained under pressure against the US dollar on Monday, with EUR/USD hovering near 1.1590 after a sharp pullback at the end of last week. Although the pair recovered modestly during early Asian trading, it stayed close to the 1.1600 threshold as investors continued to assess the implications of Federal Reserve Chair Kevin Warsh’s Jackson Hole address.

The dollar strengthened on Friday as traders interpreted Warsh’s comments as a warning that the Fed’s fight against inflation was not complete. That reaction pushed EUR/USD below 1.1600 and reversed part of the euro’s earlier advance.

US Treasury yields also moved higher, increasing the relative appeal of dollar-denominated assets. The two-year Treasury yield, which is particularly sensitive to expectations for Federal Reserve policy, rose nearly 12 basis points to 4.348% on Friday. The benchmark 10-year yield advanced five basis points to 4.721%.

The rise in yields suggests that investors are pricing in a greater possibility that US interest rates will remain elevated or increase further. This shift has limited the euro’s ability to regain momentum, even as the currency pair stabilised at the start of the new week.

Warsh reinforces the Fed’s 2% inflation target

Warsh used his August 28 Jackson Hole speech to emphasise that the Federal Reserve’s price-stability objective remains firm. He described the 2% PCE inflation goal as a “firm, fixed target” and argued that inflation would not necessarily return to that level without additional policy action.

The Fed chair said policymakers needed to be confident that underlying inflation was moving towards the target clearly and quickly enough. Otherwise, he indicated that the central bank still had work to do.

However, Warsh stopped short of committing to a particular interest-rate decision. He concluded that he was committed to a policy discipline rather than a predetermined move, preserving the Fed’s ability to respond to incoming economic information.

This distinction is important for currency markets. The speech did not guarantee a September rate increase, but it challenged expectations that the Fed would soon shift towards a less restrictive position. The emphasis on persistent inflation and resilient economic activity encouraged traders to reassess the near-term outlook for US borrowing costs.

Warsh also argued that broad financial conditions did not appear particularly restrictive. He highlighted solid consumer spending, rapid business investment, stable employment and strong credit-market activity. These conditions could allow the central bank to prioritise inflation without facing immediate pressure from a sharp deterioration in the labour market.

The speech therefore strengthened the dollar by widening the perceived policy gap between the Federal Reserve and central banks that may have less room to tighten.

US PCE inflation remains well above target

The latest US inflation figures reinforced the cautious policy message. The July PCE price index rose 0.2% from June, reversing the previous month’s 0.1% decline. Annual headline inflation reached 3.7%, remaining significantly above the Federal Reserve’s 2% objective.

Core PCE inflation, which excludes food and energy, also increased 0.2% month on month and 3.3% from a year earlier. The figures were released on Wednesday, August 26, rather than Friday, but they formed an important part of the economic backdrop to Warsh’s Jackson Hole remarks.

Warsh noted that recent inflation readings had been better than anticipated but said they did not demonstrate a meaningful improvement in the underlying trend. He also highlighted the breadth of price pressures, with more than half of the components in the PCE basket recording annual increases above 3%.

The combination of above-target inflation and stable employment complicates the outlook for monetary policy. If price pressures remain persistent while economic activity holds up, the Fed may have room to maintain restrictive rates for longer or consider another increase.

For EUR/USD, that scenario would generally favour the dollar by supporting US yields and preserving the currency’s interest-rate advantage.

Euro faces competing policy signals

The euro’s outlook is not entirely negative. European inflation developments could encourage the European Central Bank to maintain a relatively firm policy position, particularly if energy costs and services inflation remain elevated.

German inflation data will be closely monitored because a stronger-than-expected reading could increase expectations for further ECB tightening. A more hawkish ECB outlook would narrow the perceived policy gap with the Fed and could provide the euro with short-term support.

However, the euro area continues to face a less robust growth environment than the United States. Economic weakness could limit the ECB’s willingness to raise rates aggressively, even if inflation remains above target. This creates a difficult balance between controlling prices and avoiding additional pressure on regional activity.

The resulting contrast leaves EUR/USD sensitive to changes in relative interest-rate expectations. Strong US data or renewed inflation concerns could favour the dollar, while firmer European inflation or improved eurozone activity could help the euro recover.

EUR/USD outlook ahead of the September Fed meeting

Attention is now turning to the Federal Reserve’s September 15–16 meeting, which will include updated economic projections. Employment, wage and inflation releases before the meeting could materially affect the policy decision.

A resilient US labour report combined with continued inflation above 3% would strengthen the case for tighter policy and could keep EUR/USD below pressure. Conversely, weaker hiring or a clear slowdown in price growth could reduce expectations for a rate increase and allow the euro to recover.

From a technical perspective, the 1.1600 area remains an immediate reference point. A sustained move above that level could improve short-term momentum, while renewed selling may place attention on the 1.1570 area and then the broader 1.1480 region.

The near-term direction will depend less on a single speech than on whether upcoming data support Warsh’s concern that underlying inflation is not returning to target quickly enough. Until that question becomes clearer, elevated Treasury yields and restrictive Fed expectations may continue to limit EUR/USD gains.