Trump’s Fed Watch: Hawkish Hopes vs. Dovish Dangers.

  • Fed Chair Race Heats Up: Trump could announce a new Fed Chair soon, with Kevin Warsh (hawkish) and Kevin Hassett (dovish) leading the pack—dollar impact will depend on who is chosen.

  • Market Focus on Dovish Shift: Warsh’s nomination would likely boost USD, while Hassett or Malpass could signal a dovish pivot, weakening the dollar.

  • Trade Developments Add Noise: Trump teased upcoming tariffs on semiconductors and pharma; a China trade truce extension is likely but uncertainty lingers.

  • EUR/USD Driven by USD Moves: Euro is gaining more from dollar weakness than eurozone strength, with a 1.17 target still in view despite shaky momentum.

  • GBP on Hold Ahead of BoE: Pound remains under pressure with traders awaiting Thursday’s BoE decision and guidance for the rest of 2025.

USD: Fed Chair Pick Looms Amid Market Caution

President Trump dropped a few policy hints in a CNBC interview yesterday. Most notably, Treasury Secretary Scott Bessent is officially out of the running to replace Jay Powell as Federal Reserve Chair. Trump named Kevin Warsh and Kevin Hassett as front-runners, while Chris Waller and David Malpass may also be under consideration. Online betting markets currently show Hassett slightly ahead. Trump also teased that an announcement could come soon—possibly even before January—to fill the seat vacated by Adriana Kugler.

Although Trump’s recent critiques of the Bureau of Labor Statistics haven’t shaken markets yet, they raise concerns that his Fed pick might adopt similar views, potentially undermining the central bank’s credibility. That outcome would likely weigh on the dollar.

From a market standpoint, Warsh is the most USD-positive candidate. He’s considered hawkish, recently reaffirming a monetarist stance on inflation, which favors tighter policy. Waller could offer similar (albeit less pronounced) support for the dollar. Hassett and Malpass are viewed as more dovish, possibly more pliable to Trump’s policy preferences—both likely negative for USD sentiment.

Trump also signaled new trade actions: semiconductor and pharmaceutical tariffs could arrive next week. He also said a China trade truce extension is close. While markets expect the truce to hold, looming sector-specific tariffs are moderately weighing on the yuan.

FX volatility has remained subdued since Friday’s strong payroll-driven moves. Yesterday, the dollar briefly recovered before soft US ISM Services data pushed it lower again. Today’s focus will be speeches by FOMC voters Lisa Cook and Susan Collins—both dovish-leaning. If they float the idea of a September rate cut, the dollar could face further pressure. Overall, we remain dollar-bearish this week as Fed expectations shift and Trump’s early Fed pick could tilt the balance further toward dovishness for the remainder of 2025.

EUR: Dollar Still in the Driver’s Seat

Eurozone data remains a side story. July PMIs were revised slightly downward, but this had little effect on EUR/USD, which remains driven by movements in the US dollar. The recent drop in EUR/USD appears unjustified when viewed through short-term interest rate spreads. The two-year EUR-USD rate gap has narrowed slightly since June, yet the euro is still trading below earlier levels.

Looking further back, though, the picture becomes more nuanced. In September 2024, the rate differential was much narrower, but EUR/USD traded lower, indicating some market reappraisal of the dollar’s risk premium—especially amid Trump’s unpredictable trade moves and Fed pressure. Still, we believe the bearish dollar narrative remains intact in the medium term.

Our near-term EUR/USD target remains 1.17, with a longer-term push toward 1.20 still possible, albeit more uncertain than earlier in the year.

GBP: Waiting Game for the BoE

The British pound weakened slightly on Tuesday, trading around $1.3274 against the dollar—a 0.3% drop from the day’s open. With the Bank of England’s interest rate decision looming on Thursday, markets are cautious. A 25-basis-point cut is expected, but uncertainty surrounds the central bank’s policy direction for the rest of the year.

This ambiguity is keeping traders on the sidelines ahead of Governor Bailey’s remarks and the BoE’s updated economic forecasts. Meanwhile, USD traders are focused on upcoming speeches by Fed policymakers Cook and Collins. Any hint of increased Fed support following poor payroll numbers could pull the dollar down further.d

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.