Warsh’s Hawkish Stance: Why Is the Euro Rising?

The euro strengthened, approaching the 1.1600 level against the US dollar during early Asian trading on Monday (August 31). The EUR/USD pair hovered around 1.1590 as the dollar weakened slightly ahead of the preliminary release of German consumer inflation data.

The euro's appreciation occurred despite hawkish remarks made by Federal Reserve official Kevin Warsh at Jackson Hole. Warsh emphasized that the Fed must still take action if it remains unconvinced that cost-of-living pressures and core inflation are moving downward toward the target at an adequate pace.

These statements heightened market expectations for a 25-basis-point interest rate hike at the Fed's September 15–16 meeting. The probability of a rate hike reportedly surged to approximately 57.5%, up from 35% prior to Warsh's speech.

Market focus has now shifted to German inflation. The annual CPI for August is expected to rise to 2.9% from 2.8%, while the Harmonized Index of Consumer Prices (HICP) is projected to climb to 3.0% from the previous 2.8%. Higher-than-expected figures could reinforce the case for the European Central Bank to maintain a tight policy stance and provide support for the euro.

Hotter German inflation could push EUR/USD above the 1.1600 mark while weighing on the US dollar. Such conditions might support gold prices, though gains could be capped by expectations of higher Fed interest rates. Conversely, softer German inflation could weaken the euro and restore dollar dominance.