The EUR/USD exchange rate retreated sharply as market participants reacted to the rising odds that Kevin Warsh will become the next Federal Reserve Chair. It retreated to a low of 1.1925, down from the year-to-date high of 1.2077 ahead of the upcoming European Central Bank (ECB) decision.
Kevin Warsh to become next Fed Chair
The EUR/USD pair retreated as the US Dollar Index (DXY) rebounded after the media confirmed that Donald Trump would nominate Kevin Warsh, an economist at the Hoover Institution, to become the next Federal Reserve Chair.
Trump and his officials met with Warsh on Thursday. He also confirmed that he will make his Fed Chair on Friday morning, with odds on Polymarket rising to 95%.
The dollar rose, and American equities surged because of the view that Warsh will be less enthusiastic to cut rates than the other contenders, like Kevin Hassett, Christopher Waller, and Rick Rieder.
The announcement comes a day after Trump called Jerome Powell a moron for not cutting interest rates in the last meeting. Trump advocated for cutting rates to as low as 1% despite his constant talk of the economy firing on all cylinders.
Recent data showed that the economy was doing well, with inflation being contained below 3% and the economy expanding by 4.4% in the third quarter of last year.
Still, there is a likelihood that Trump will get frustrated by his Fed nominee because he will be a member of the FOMC committee that is made up of 12 voting members. To cut rates, Warsh will need to convince the other committee members to do that.
ECB interest rate decision ahead
The next major catalyst for the EUR/USD pair will be the upcoming interest rates decision, which will happen on Thursday next week.
In theory, such a decision should be a big deal for the pair as the ECB is one of the most important central banks globally.
However, the pair will likely react mildly to this decision as officials will likely leave interest rates unchanged.
A Bloomberg poll published today shows that most economists expect the bank to leave interest rates unchanged for the remainder of the year and then start hiking next week.
The European economy is doing well, with most countries experiencing some growth. At the same time, inflation has moved to the target of 2.0%, meaning that the bank has no urgency to cut rates. A top analyst told Bloomberg:
“While a rapid US dollar depreciation remains a fat-tail event, the ECB would need to reconsider the balance of risks regarding euro-area inflation assuming further increases in the value of the euro.”
EUR/USD technical analysis
The daily timeframe chart shows that the EUR/USD exchange rate has been in a strong uptrend in the past few months. It jumped to a high of 1.2077 this week and then pulled back to 1.1917.
The pair has remained above the 50-day and 100-day Exponential Moving Averages (EMA) and the Supertrend indicator.
It has retested the key support level at 1.1917, the upper side of the ascending triangle pattern.
Therefore, the pair will likely continue rising as bulls target the key resistance level at 1.2100. This view will be confirmed if it moved above the year-to-date high of 1.2077.
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