The recent shift in EUR/USD is primarily influenced by the change in Fed expectations following the confirmation of Kevin Warsh as the next Fed Chair. The pair recently approached the significant psychological level at 1.2000 and momentarily exceeded it. However, following the announcement of Warsh’s nomination, the dollar regained strength, causing EUR/USD to sharply decline from the 1.1970–1.2000 range back into the low 1.19s. During the intraday session, the pair fluctuated between 1.1880 and 1.1890, following a peak close to 1.1974, resulting in a return of 70 to 90 pips to the dollar within the same trading day. The dollar index has successfully surpassed the 96.35–96.50 resistance range, advancing towards the 97.00 level. Market participants are now setting their sights on the 97.10–97.25 area as the next potential target for upward movement. The nearly 1% increase in the index occurred alongside the EUR/USD falling below the previous 2025 high of 1.1918 and briefly dipping under 1.1850, indicating that the euro’s bullish trend is no longer operating in a linear fashion. This represents a fundamental change in the economic landscape: for an extended period, the prevailing narrative centered around a fatigued Federal Reserve and a dollar exhibiting inherent weaknesses. Warsh’s reputation for stringent discipline, coupled with a White House that appears increasingly accepting of a strong currency, has altered the narrative just as EUR/USD reached levels above 1.2000.
The Warsh narrative coincided with a favorable US data release for the dollar. Producer prices for December exceeded market expectations significantly. Headline PPI increased by 0.5% month-over-month, surpassing expectations of 0.2%, while core PPI experienced a notable rise of 0.7% month-over-month, compared to the anticipated 0.2% consensus. On a yearly basis, headline PPI remained at 3.0% y/y rather than decreasing to 2.7%, while core PPI increased to 3.3% y/y from 3.0%, contrary to expectations for a decline to 2.9%. The data indicates the reason behind the rise of US 10-year yields to approximately 4.24–4.25% and their stability at that level. With upstream inflation hovering at approximately 3% and trending negatively in the core, expectations for rate cuts needed to be reassessed. The current market expectations indicate a greater than 70% likelihood of a 25 basis point increase at the March Federal Reserve meeting, a significant rise from approximately 45% just one week prior. The repricing reflects the characteristics of a dollar rebound. The macroeconomic landscape for the euro appears to be steadily positive, though it lacks any remarkable highlights. The Eurozone’s Q4 GDP increased by 0.3% quarter-on-quarter, surpassing the consensus estimate of 0.2%. Meanwhile, the annual growth rate for the region stood at approximately 1.4% year-on-year, compared to expectations of around 1.2%. Germany, the central player in the euro area, reported a 0.3% quarter-over-quarter growth in Q4 and approximately 0.4% year-over-year growth, which is modest yet distinctly not indicative of a recession. Inflation in Germany, as indicated by HICP, increased from 2.0% to 2.1% year-over-year, aligning precisely with the ECB’s target range.
The current dynamics of growth and inflation are not the factors driving the decline of EUR/USD. The key factor is the relative shift: US inflation has unexpectedly risen just as the Fed adopts a more hawkish stance; Eurozone data has exceeded expectations by a small margin, yet it does not compel the ECB to implement further tightening measures. The significance of that divergence outweighs the marginally “good” nature of the euro data when considered in isolation. Prior to EUR/USD exceeding 1.2000, officials in Frankfurt had begun to express concerns regarding a robust euro. A shift from 1.17–1.18 to 1.20 in a brief period results in more stringent financial conditions due to diminished export competitiveness and reduced imported inflation. Market commentary from various desks aligns on a common perspective: the ECB is anticipated to maintain the deposit rate around 2.00% for a prolonged duration while remaining “data-dependent,” but is unlikely to pursue another tightening cycle like the Fed. Simultaneously, initial open discussions are emerging regarding potential rate cuts in the future if the strength of the euro and a slowdown in global trade begin to hinder growth. That contrasts sharply with the situation across the Atlantic, where a hawkish Fed Chair and persistent PPI are steering the dialogue towards a prolonged period of elevated rates. This policy divergence limits the potential for EUR/USD appreciation. As the pair surpassed 1.2000 and approached 1.2082 (the late-January high), the risk associated with the ECB became asymmetric: just a few more hawkish signals from US officials or a single dovish remark from Frankfurt could significantly impact the euro’s strength. We are closely observing that dynamic at this moment. The alignment of positioning and volatility indicates a definitive change. The euro had experienced strong demand for several months, driven by a narrative of a prolonged decline in the dollar. Investors established significant long positions in EUR/USD as the dollar weakened, while volatility remained subdued. This week marked a significant shift. The Cboe EuroCurrency Volatility Index surged approximately 15% within a few days, indicating that options traders are actively adjusting their expectations for more significant fluctuations in the near future. Simultaneously, there has been an increase in demand for EUR/USD put options, as traders are focusing on downside targets such as 1.1850 initially and 1.1730 subsequently. The strikes align with significant spot supports, indicating the areas where hedging and speculative flows are concentrated.
The structural backdrop will resonate with those who engaged in trading EUR/USD in the period of 2014–2015. At that time, the Federal Reserve was progressing towards normalization, whereas the European Central Bank continued its easing strategy through quantitative easing, leading to a prolonged rally of the dollar. Today’s configuration may not be identical, but it certainly resonates: a more hawkish Fed Chair, a persistent domestic US inflation profile, and an ECB that is already subtly concerned about a “too strong” euro. The distinction in this instance lies in the initial position. The dollar has experienced a prolonged bull phase over several years, yet some analysts continue to advocate for a sustained downtrend in the USD as global capital undergoes reallocation. The interplay between long-term bearish narratives for the USD and the short-term hawkish repricing by the Fed contributes to the volatility and sharp movements observed in the EUR/USD market.