Dollar Rallies as Warsh Emerges as Top Fed Chair Pick

EUR/USD Whipsaws as Dollar Bulls Regain Momentum

The dollar strengthened late last week after U.S. President Trump nominated Kevin Warsh as his favorite to take the Federal Reserve Chair after Powell’s term ends in May. Warsh is a former Federal Reserve governor and supports lower rates, but not as aggressively as some other candidates.

The Fed maintained a target rate of 3.50% to 3.75% during last week’s meeting, which was largely anticipated and already priced into the market. However, on Friday, the Producer Price Index (PPI) surprised to the upside, posting a reading of 0.7% for the Core version, way above the estimate of 0.2%. Although the PPI showed that inflation is heating up, the probability of a June rate cut did not change significantly, currently sitting at 50.2%, according to the CME FedWatch tool.

Last week was wild, with EUR/USD reaching as high as 1.2080 before pulling back, and volatility will likely stay elevated this week, with the labor market data on the horizon. The ECB and BoE will announce their interest rates, but no changes are expected, which may lower the impact.

Economic Calendar Highlights

The first release of the week will be the U.S. Manufacturing PMI, scheduled for Monday at 3:00 pm GMT. The Services PMI will follow on Wednesday at 3:00 pm GMT.

The Bank of England (BoE) will announce the interest rate on Thursday at 12:00 pm GMT, and Governor Bailey will hold a press conference half an hour later. The European Central Bank (ECB) will announce the rate at 1:15 pm GMT, and ECB President Lagarde will hold a press conference half an hour later. The actual rate announcements will not trigger volatility unless there’s a surprise adjustment of any of the rates. Traders will be more interested in the press conferences because that’s when the heads of central banks usually announce their next steps.

The most important release of the week will be the U.S. Non-Farm Payrolls (NFP) report, scheduled for Friday at 1:30 pm GMT. The Fed’s dual mandate aims to keep inflation in check and job creation high, so the NFP is a closely watched indicator, and usually a volatility catalyst. The Average Hourly Earnings and Unemployment Rate will be announced at the same time. Together with the NFP, these indicators paint an accurate picture of the U.S. jobs market.

Technical Outlook – EUR/USD

It’s been a while since we’ve seen such strong moves on EUR/USD. The pair opened last week at 1.1861, reached a high at 1.2082 and then travelled the entire distance back down, finishing the week very close to where it started, at 1.1848.

The RSI was overbought and is now moving straight down, with the price below 1.1900, which is now resistance once again. The previous move up was mainly triggered by dollar weakness, not euro strength, and now that the dollar is boosted by Warsh’s nomination, the move down will probably continue.