Fed Preview: Warsh vs Trump

The Federal Reserve is expected to raise interest rates on Wednesday for the first time since July 2023, defying President Trump's public calls for cuts.

Markets are pricing a 92.7% probability of a 25 basis-point hike, lifting the target range to 3.75%-4.00%. Fed Chair Kevin Warsh has largely avoided forward guidance ahead of the decision, leaving traders to build the case for a hike from the underlying data themselves. A move against a sitting president publicly pushing the other way would be a rare test of the Fed's independence, coming roughly seven weeks before November's midterm elections.

Latest Market Moves

• EUR/USD had been trading around 1.1550 as of Wednesday morning, still consolidating after breaking below the rising trendline it had followed since July.

• Gold had climbed to around $4,375 in early Wednesday trade, up almost 1% on the day, as haven demand builds into the rate decision.

• Brent crude was trading near $107.70 heading into Wednesday's session, down about 1% but still roughly 20% above its 200-day average.

• The US 10-year Treasury yield was hovering near 5.00% early Wednesday, matching Tuesday's close at its highest level since 2007, as traders price in a less dovish Fed path.

A Hike the Fed Can't Easily Avoid

Wednesday's decision is barely in doubt.

Inflation data through the summer left Warsh little room to hold rates steady without undercutting the Fed's own price-stability message. Unemployment has stayed low enough that policymakers see little labour-market cost to tightening further. Markets have priced the move so thoroughly that a hold, not the hike, would be the bigger shock to currency and rates traders on Wednesday afternoon.

Trump vs Warsh: A Test of Fed Independence

The White House wants the opposite outcome.

President Trump has repeatedly pushed for rate cuts, arguing lower borrowing costs would support growth and jobs. National Economic Council Director Kevin Hassett said this week that Trump "100% respects the independence" of Warsh and would back the Fed's call either way, even if the president "wouldn't be super happy" about a hike. That public deference doesn't erase the tension, since a Fed chair raising rates against an incumbent president's explicit wishes is rare enough to draw scrutiny well beyond currency markets.

Why a Hike Before the Midterms Is Unusual

Central banks also tend to avoid big surprises right before elections.

The decision lands roughly seven weeks ahead of November's midterms, a window in which policymakers have historically preferred to stay quiet rather than hand either party a fresh talking point. A rate hike that lifts borrowing costs heading into the vote invites exactly the kind of political scrutiny the Fed usually tries to avoid. That the data has pushed Warsh toward hiking anyway underlines how little room the numbers are leaving him to wait.

EUR/USD: Trendline Support Gives Way

EUR/USD's break below its summer uptrend is the clearest technical signal of the hawkish repricing.

The pair had followed a steady ascending trendline connecting its late-July low near 1.1420 to a series of higher lows through August and into September, climbing as high as 1.1720 along the way. That trendline gave way this week, with EUR/USD sliding from around 1.1600 to test the 1.1500 handle before steadying near 1.1550.

The 14-period RSI on the 4-hour chart has fallen to 41.7, having dipped below 30 in the days leading up to the decision, signalling bearish momentum. A confirmed hike would likely keep the pair capped below the broken trendline, now acting as resistance near 1.1600, with the next support at the 1.1500 handle. A hold, or a less hawkish tone from Warsh, would open the door to a snapback toward that former trendline. A move over the trendline negates the bearish bias.

Source: SpreadEx | EUR/USD, 4-Hour Chart