EUR/USD Slumps on Warsh's Hawkish Comments, Eurozone Inflation Remains a Concern

The EUR/USD pair struggled to recover from its decline on Friday, trading around 1.1590 as of August 31. The main catalyst for this weakness was a speech by Kevin Warsh at Jackson Hole, which reassessed the Fed's policy path and indicated that another rate hike remains possible.

Warsh stated that inflation trends were still not showing sufficient progress toward the 2% target, leaving room for further tightening if necessary. This statement caused market expectations to shift, with the probability of a 25 bp move in September rising to around 57%, up from 35% beforehand.

The short-end Treasury yields also rose significantly, reaching around 4.33%, which reinforced dollar demand and increased the appeal of dollar assets. In contrast, eurozone inflation remains a concern for the ECB, with July inflation coming in at 2.9% y/y, core inflation accelerating to 2.5%, and services inflation rising to 3.3%. However, August data from France and Spain showed renewed acceleration.