The US dollar rose while the euro and the pound sterling fell after remarks from two Fed officials who agreed on one point: rates need to be raised; the only question is the pace. That is an important signal for FX markets because last week the dollar lost ground amid the sense that a rate decision was being deferred until October inflation data. The market has now been reminded that some of Kevin Warsh's colleagues view a pause as a mistake.
St. Louis Fed President Alberto Musalem said the Federal Reserve needs to raise rates again soon to restore price stability. He argued that inflation remains too high and is unlikely to fall without additional action, that policy is still accommodative and that financial conditions remain loose. Alberto Musalem added that raising interest rates sooner would reduce risks to the economy. The logic is straightforward: the longer the 3.75–4.00% funds rate remains below the level consistent with 3.6% overall PCE inflation, the more aggressive policy will have to be later.
Compared with his earlier comments, Musalem's tone has clearly hardened. On October 8, he said the funds rate should rise over the next 6–9 months to return inflation to the 2% target and did not support an October move. That was a drawn-out timetable; now he speaks of "the near term." Over the past three weeks we have seen September data showing overall PCE accelerated by 0.5% month-on-month — the fastest pace since March — and core PCE at 3.1% year-on-year. Recall Musalem's previous remark that "the value of waiting is small," so today's comments are a logical continuation of that line.
Richmond Fed President Tom Barkin was even more explicit about the direction. He said policy direction is already clear and the main question is the pace of rate changes. Barkin also argued that the investment boom in artificial intelligence is adding to demand-side inflation, and that the Fed can counteract it. Previously, Barkin warned that accumulated imbalances would eventually have to be paid for, without specifying a timeframe. Now he names both the mechanism — overheated AI-driven demand — and the instrument — the policy rate.
Note that neither of these two are voting members of the committee this year, so their statements do not formally determine decisions. But the market listens closely because they frame the internal Fed debate. Recall that on October 28 the rate was held in a 10–2 vote, with Lisa Cook and Beth Hammack voting for a 25-bp increase. Warsh declined to forecast the December decision, and after the meeting the market priced in about an 85% chance of a hike on December 9.
The chain of events is as follows. First, National Economic Council Chair Kevin Hassett said a very high October inflation print would warrant action, and the dollar reacted weakly because the decision seemed deferred. Now two Fed officials say not to delay, restoring the probability that a rate hike could occur irrespective of a single month's data. The dollar benefits, while euro and pound buyers who had bet on a continued rebound lose out. This is especially unwelcome for the eurozone, since the ECB last week left rates at 2.50% and Lagarde only flagged a possible December move.
Another factor is that high energy prices continue to feed inflation expectations. Brent rose above $116 last week on the risk of renewed strikes on Iran after the November 3 Congressional elections, giving hawks an extra argument. If oil stays at those levels, Musalem's point that inflation will not fall on its own will be reinforced month after month. That is a double hit for European currencies, because expensive oil hurts energy-importing economies more than the US.
I expect the dollar to maintain an edge over the euro and the pound in the coming days until the market receives new data that softens the hawks' case. With US elections imminent and October inflation data pending, sharp moves are unlikely, but pressure on European currencies should persist in my view. If hawkish remarks are not followed by weak consumer data, a return of the euro and pound to recent highs will be doubtful.
Technical outlook for EUR/USD
Buyers need to reclaim 1.1210 to target a test of 1.1231. From there, a move to 1.1254 is possible, though doing so without support from large players will be difficult. On any pullback, serious buying is likely only around 1.1175. If no bids appear there, it would be prudent to wait for a break of the 1.1140 low or consider opening longs from 1.1110.
Technical outlook for GBP/USD
Pound bulls need to take immediate resistance at 1.3430 to target 1.3467; above that level, further progress will be difficult. The farther target is 1.3492. On a downside move, bears will try to seize control at 1.3404. If they succeed, a range break would deal a serious blow to bulls and push GBP/USD toward 1.3363 with the potential to extend to 1.3332.
