The EUR/USD dropped by 0.75% because of Kevin Warsh’s potential nomination as the Federal Reserve Chairman. This caused US yields to rise and increased demand for the Dollar. The Euro traded at 1.1882, influenced by strong demand for the US Dollar driven by expectations that the Federal Reserve will maintain steady interest rates. This follows unexpected increases in US producer inflation data. Kevin Warsh’s nomination is helping the Dollar gain strength, with the US Dollar Index almost up by 1%. US Treasury yields also increased, with the 10-year yield around 4.25%, as the Federal Reserve sticks to its steady rate stance. Despite Germany’s economy growing by 0.4% year-over-year, Eurozone GDP data did not provide enough support against the strong Dollar.

Producer Price Index and Eurozone Growth

The Producer Price Index (PPI) inflation remained stable at 3.0% year-over-year in December. Core PPI rose to 3.3%, showing ongoing price pressures. The Eurozone’s GDP grew by 1.4% year-over-year, with Germany performing better than expected. Technically, the uptrend for EUR/USD is at risk; if it breaks below 1.1800, it could fall to 1.1743. Warsh’s nomination and rising producer inflation have significantly boosted the US Dollar. Markets are now pricing out the expected rate cuts for this year. This change in policy is the main reason for the Euro dropping below 1.1900. The December 2025 PPI report revealed core inflation accelerated to 3.3% year-over-year. The Bureau of Labor Statistics indicates that while goods inflation has eased, services inflation persists above 4.5%. This persistence supports the Fed’s cautious approach and higher US Treasury yields, which are firmly above 4.25%.

Market Implications and Strategies

In this context, there’s a strong case for betting on further Euro weakness against the Dollar. Recent data shows the three-month risk reversal for EUR/USD has fallen to -0.90, the lowest since the third quarter of 2025. This suggests rising demand for put options that could protect against or benefit from further declines in the exchange rate. We also need to consider the growing difference in monetary policy between the US and Europe. While there is less than a 10% chance of a Fed rate cut before summer, the market sees a 45% chance of a European Central Bank rate cut in the same timeframe. This discrepancy is likely to continue weighing on the EUR/USD. This scenario reminds us of past changes in Fed leadership, where a new, more hawkish chair marked a shift in policy. We witnessed a similar trend during Paul Volcker’s time in the early 1980s, which led to a multi-year bull market for the US Dollar. Warsh’s nomination, seen as hawkish, suggests we might be starting a similar trend. With key US jobs data and an ECB meeting coming up next week, traders should brace for increased volatility. The recent drop below the 1.1850 support level is crucial and opens the possibility for a move toward 1.1800. Strategies that take advantage of a declining EUR/USD or increasing volatility, like buying puts or put spreads, seem to be wise choices in the coming weeks. Create your live VT Markets account and start trading now.

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