Silence is golden, but not for the currency market. The silence of new Federal Reserve Chair Kevin Warsh ahead of the July meeting keeps EUR/USD on edge.

The US dollar had its best week in a month, but the de-escalation of the Middle East conflict caused the greenback to retreat from local highs. Nevertheless, according to CFTC data, speculative traders have pushed their bullish bets on the US currency to $43.3 billion – the highest level since 2015.

Dynamics of Speculative Positions on the US Dollar

At the same time, the FOMC meeting on July 28 and 29 looks like a minefield. Unlike his predecessors, Warsh has refrained from signaling the fate of the rate. As a result, the market is divided: the probability of a hike is estimated at 35-40%, while it was much lower recently. The acceleration of oil prices amid escalation in the Middle East and the new 10.0-12.5% tariffs from the White House on imports from most major trading partners fuel inflation risks and play into the hands of the hawks on the Open Market Committee.

According to TD Securities, positioning on the US dollar remains long but is still far from overheated, which means there is room for increasing bets on the strengthening of the greenback if uncertainty surrounding oil, geopolitics, and the Fed's trajectory persists. The company expects continued bullish momentum for the greenback in the third quarter.

Market Expectations for Fed Rates

Morgan Stanley, on the other hand, maintains a neutral position on the USD index, noting the risks of a decline following softer-than-expected CPI and PPI reports in June. According to the bank, by September, disinflationary pressure in the US will become more evident, leaving less reason for Fed monetary tightening.

The fate of EUR/USD largely depends on oil. ING believes the strength of the dollar will persist until Washington and Tehran reach a new ceasefire. De-escalation would collapse black gold prices and reduce expectations for tighter monetary policy from the Fed. The opposite scenario—continued escalation and a rally in oil—would force the central bank to act. Commerzbank does not even rule out a fall of the euro below $1.13 if the geopolitical premium in oil does not disappear.

However, there is also a downside. Expectations of an European Central Bank rate hike partly offset the negative impact of the oil spike on the regional currency. This was the case in June when the memorandum of understanding between the US and Iran provided no support for the euro specifically due to the sharp decline in Brent.

Will the market get a response at the Fed meeting, or will Warsh choose to remain silent again? I doubt that silence will satisfy investors two times in a row.

Technically, on the daily chart, EUR/USD saw a retracement of the inside bar, but the long upper shadow of the bar breakout indicates weakness among the bulls. A move beyond the fair value range of 1.1385-1.144, followed by a new local low at 1.1365, would warrant short positions.