EUR/USD has defied aggressive bearish predictions, consolidating in a 1.1360-1.1480 range in July after printing a bottom at 1.1325 on June 24. The EUR’s weakness in June was primarily caused by USD strength following the hawkish June 16-17 FOMC meeting, and its subsequent consolidation in July was driven by an erosion of market expectations for a September Fed hike, following the softer US nonfarm payrolls and cooling CPI and PPI inflation data.
Underpinning the EUR is a market preference for the European Central Bank’s transparent new Framework Guidance over Fed Chairman Kevin Warsh’s mission to end forward guidance. The ECB’s rule-based structure provides investors with predictable parameters to anchor risk. For example, ahead of next week’s June 23 Governing Council meeting, the ECB has flagged a tactical pause while keeping the door open for a September hike. The ECB’s Framework Guidance employs a data-dependent, meeting-by-meeting approach structured around three pillars: the medium-term inflation outlook, the underlying inflation dynamics that drive core inflation, and the strength of monetary policy transmission.
Conversely, Warsh’s obscure communication strategy has bred market frustration ahead of next week’s pre-FOMC blackout period. While a pause is expected at the July 28-29 FOMC meeting, Warsh’s testimony to US lawmakers this week showed his intention to maintain an uncertainty premium in the market’s pricing for a September hike. Instead, Warsh plans to use the upcoming meeting for an "honest internal discussion" among FOMC participants. This creates an acute institutional gridlock: 9 out of 18 participants have pencilled in at least one more hike this year, directly clashing with Warsh’s own stated view that upside inflation risks have subsided. By treating the Summary of Economic Projections as a battleground for internal debate rather than a tool for public coordination, Warsh risks undermining the significance of the dots at the next September meeting.
Given the market’s extended long USD positions, some market participants have already shifted into NZD because the Reserve Bank of New Zealand has offered clearer guidance for a September 2 rate hike following its July 8 pause decision. Let’s see if the ECB provides the same incentive at next week’s meeting to lift EUR/USD above 1.15.
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