Beyond Hormuz: Why the Warsh Hearing and the US Rate Path Are Now Driving the Dollar
Jamie Barry Lamera Capital
2026-04-21
For the past seven weeks, currency markets have moved on a single question: what happens in the Strait of Hormuz. That framing was correct while the oil price shock was the dominant variable. It is less correct now. The ceasefire expires on Wednesday and the situation remains tense, but something more structural has taken over as the driving force behind dollar weakness.
Today, at 10am Eastern Time, Kevin Warsh appears before the Senate Banking Committee for his confirmation hearing as the proposed next Chair of the Federal Reserve. The hearing itself is procedurally constrained, since Republican Senator Thom Tillis has publicly committed to blocking the nomination. But what matters for currency markets is not whether Warsh is confirmed today. It is what his arrival signals about the path of US interest rates through the end of 2026 and into 2027.
The dollar has already begun to reflect this shift. The Dollar Index sits near 98, its lowest level since before the conflict began at the end of February. It has fallen for three consecutive weeks, reflecting in part the usual unwinding of safe-haven premium as geopolitical risks ease. But the scale and persistence of the decline suggests something further is at work. The underlying case for a softer dollar was building before the conflict began, and that case is reasserting itself now that the geopolitical overlay is fading.
Understanding why this matters for sterling and the euro, which have both been strengthening against the dollar as a result, requires moving past the noise of today's hearing and focusing on the substance: where rates are actually heading, why, and how quickly.
The Rate Path Hidden in Plain Sight
The federal funds rate currently sits in a range of 3.50 to 3.75 percent. The neutral rate, the level at which monetary policy neither stimulates nor restrains the economy, is generally estimated at between 3.00 and 3.25 percent. Policy is therefore running approximately fifty basis points above neutral.
That single fact frames the entire rate debate. The Federal Reserve is not tight in any historically extreme sense. It is modestly restrictive. The question over the next twelve months is not whether to cut, but when, and in response to what. Crucially, that question has nothing to do with political pressure from the White House. It is simply the mechanical consequence of an economy where inflation is expected to peak in the coming months and then moderate, while growth is being dragged by the same shock that caused that peak.
The substantive case for one rate cut by the end of 2026 rests on three connected observations.
First, the inflationary impulse from the oil shock is likely to peak in the coming months rather than accelerate further. The March CPI reading of 3.3 percent was driven almost entirely by energy, with gasoline alone accounting for nearly three quarters of the monthly increase. Core inflation came in at 2.6 percent, below market expectations. Provided oil stabilises below $100 per barrel, which looks increasingly plausible given the ceasefire dynamics and the potential for new South American supply to come online at sustained higher prices, headline inflation should end 2026 closer to 2.5 to 2.75 percent, with a further decline toward the low 2s expected through 2027.
Second, the same oil shock that pushed inflation higher is beginning to weigh on growth. Higher petrol prices reduce discretionary consumer spending. Higher input costs compress corporate margins. The cumulative effect on consumer demand becomes visible with a lag, and that drag is only beginning to appear in the data. The tariff pass-through that has been working through US goods prices over the past year adds a separate, compounding drag on household real incomes.
Third, the labour market signal is increasingly pointing toward easing rather than tightening. This is the most important observation for anyone trying to anticipate the Fed's next move.
When Job Losses Outpace Inflation
The March jobs report showed a headline nonfarm payroll gain of 178,000, stronger than expected, with the unemployment rate edging down to 4.3 percent. On the surface, this looks resilient. Beneath the surface, it is not.
The household survey showed 64,000 fewer people holding jobs in March. The labour force contracted by 396,000 as workers withdrew after unsuccessful searches. Long-term unemployment remains elevated at 25.4 percent of all unemployed people. The broader U-6 measure of labour underutilisation rose to 8 percent. The quits rate is near historic lows.
Wage growth has slowed sharply. Average hourly earnings rose just 0.2 percent for the month and 3.5 percent from a year ago, the lowest annual increase since May 2021. Because headline inflation rose faster than wages in March, real wages fell by 0.6 percent on the month. For the first time in this cycle, consumers are experiencing visible erosion in purchasing power.
This is the signal that matters for rate policy. If the Federal Reserve sees the labour market softening faster than inflation is rising, it has an economic case for cuts regardless of whether energy prices remain elevated. The central bank responds to the balance between its two mandates, and when one side of that balance begins to tilt decisively, policy has to follow.
The economists at the St Louis Federal Reserve have described the current labour market as being in a "low hire, low fire" state. The language is benign, but the economic reality is that when hiring slows and workers withdraw from the labour force because they cannot find work, aggregate demand falls. Aggregate demand falling is precisely what reduces inflationary pressure over time. It is also what creates the economic justification for rate cuts that a responsible central bank can defend on its merits.
What the Banks Are Pricing
Market participants are split on how quickly this translates into action. The divergence is instructive.
Bank of America's US economist Aditya Bhave has maintained a forecast for two Federal Reserve rate cuts in 2026. BofA sees September as the likely turning point, by which time Warsh should be in place and should have accumulated enough evidence of cooling inflation to build the case for easing. The projected path would bring the federal funds rate to 3.00 to 3.25 percent, the top of the estimated neutral range. According to Bhave, cuts remain the base case because the Fed tends to look through inflation driven by supply shocks, wage pressures remain limited, and political dynamics continue to favour easing.
Goldman Sachs has also forecast two cuts in 2026, though positioning them earlier in the year. JPMorgan has pushed back on the two-cut view, arguing that persistent above-target inflation combined with the oil shock warrants a more cautious approach.
The Federal Reserve's own March dot plot showed the median projected federal funds rate at the end of 2026 at 3.4 percent, implying one cut rather than two. Current market pricing sits between these views. According to CME FedWatch data, futures currently indicate approximately a 77.5 percent probability that the Fed stays on hold through the end of the year, with meaningful probability assigned to one cut.
The dispersion between Bank of America's two-cut view and JPMorgan's no-cut view is unusually wide for a major macro call, and that dispersion itself is part of what is weighing on the dollar. When sophisticated institutions cannot agree on the direction of the most important monetary policy decision in the world, uncertainty is priced into the currency.
Our own reading of the balance of evidence is closer to a single cut by the end of 2026, taking policy to the top of the neutral range rather than into accommodative territory. The logic is straightforward: provided oil stays below $100, inflation should not accelerate to a level that demands a hike, but the drag on consumer demand and the softening labour market should be sufficient to justify moving modestly back toward neutral. A cut under these conditions would not be a pivot to stimulus. It would be a recognition that the economy no longer requires the fifty basis points of above-neutral policy currently in place.
The Warsh Hearing and How It Shapes Interpretation
Today's confirmation hearing matters because it will influence how markets read rate cuts when they eventually come.
Warsh's prepared opening remarks, released on Monday, are a careful exercise in rhetorical positioning. He states that monetary policy independence is essential. He also writes that he does not believe the operational independence of monetary policy is particularly threatened when elected officials, including presidents, state their views on interest rates. The second formulation is important. It creates a framework in which White House pressure on rates is normalised rather than resisted.
Deutsche Bank's research team described Warsh in a note last week as not structurally dovish, noting that his views have tended to skew hawkish relative to others, though his recent rhetoric arguing that artificial intelligence will act as a significant disinflationary force has muddied that characterisation. Chief US economist Matt Luzzetti wrote that Warsh will have to earn market trust and credibility around his commitment to achieving the inflation target, a task made more acute by inflation having been above target for five years, by the recent oil-driven price shock, and by the President's repeated calls for steep Fed rate cuts.
The confirmation process itself faces procedural hurdles. Senator Tillis has committed to blocking the nomination until the Department of Justice concludes or drops its criminal investigation into Powell, which was partially invalidated by a federal judge last month. All eleven Democrats on the Banking Committee are expected to vote no. Without Tillis, the nomination cannot advance. Powell has committed to remaining as chair pro tempore if no successor is confirmed by 15 May. President Trump has threatened to fire Powell if he refuses to step aside.
For currency markets, the critical point is that the interpretation of future rate cuts will be shaped by how this process unfolds. If Warsh is confirmed cleanly and the Fed cuts in response to slowing growth and cooling inflation, markets will likely accept the move as policy rather than politics. If the confirmation is contested, if Powell remains in place past 15 May against the President's wishes, or if the first cut appears to follow a period of visible Presidential pressure, markets will price in an institutional discount even if the underlying economic case for the cut is sound.
This is the real subtext of today's hearing. Not whether rates will be cut, but whether those cuts, when they come, will be seen as credible policy or as political accommodation. The dollar's three-week decline suggests markets are already beginning to price in the second interpretation.
Hormuz in the Background
The ceasefire between the US and Iran expires on Wednesday evening Washington time. President Trump has said an extension is "highly unlikely" without a permanent peace deal. Over the weekend, Iran fired on vessels attempting to transit the Strait. The US Navy seized an Iranian-flagged cargo ship in the Gulf of Oman. On Monday, only three ships transited the Strait, compared with hundreds in a normal day.
Vice President JD Vance is leading a US delegation to Islamabad for a second round of peace talks, though Iranian participation remains uncertain. Oil is trading near $95 per barrel for Brent and $86 for WTI.
These developments matter, but their market impact is now second-order. The first-order question has shifted to the Federal Reserve, the path of US interest rates, and what the institutional transition at the Fed means for the credibility of any rate decisions that follow. Hormuz affects the speed of the inflation retreat. It does not fundamentally change the direction of the rate cycle.
A renewed escalation in the Gulf would of course push oil higher again and complicate the inflation picture. But even in that scenario, the labour market weakness and consumer stress now visible in the data would continue to build pressure for cuts. The energy channel has become one variable among several rather than the dominant driver.
Sterling and Euro Positioning
The dollar's softer tone has lifted both sterling and the euro. GBP/USD has been trading close to 1.35, near an eight-week high, while EUR/USD has held above 1.17, a level it had not consistently reached since February.
The Bank of England meets on 30 April with its base rate at 3.75 percent. A Reuters survey of fifty economists found that forty-five expect a hold, while five expect a 25 basis point hike. UK CPI was unchanged at 3.0 percent in February, with core at 3.2 percent and services at 4.3 percent. The OECD expects UK inflation to reach 4 percent this year, the second-highest rate in the G7 after the United States.
Sterling's recent strength has been driven more by dollar weakness than by UK economic outperformance. The UK growth profile remains subdued, the labour market has softened, and fiscal pressures ahead of the autumn Budget are a background risk. If the dollar's decline pauses, sterling's recent gains could prove fragile.
The European Central Bank also meets on 30 April with its deposit rate at 2.0 percent. The ECB has more room to manoeuvre on rate cuts if inflation proves contained, but the governing council has signalled it will not act prematurely. For EUR/USD, the dominant driver remains the dollar side of the equation. If the dollar's structural weakness continues, EUR/USD could extend gains toward 1.18 or higher. If the dollar stabilises, euro upside is limited by the region's weaker growth profile.
What This Week Actually Changes
The Warsh hearing today will not produce confirmation. It will produce a clearer picture of how the proposed next Fed Chair thinks about the relationship between political pressure and monetary policy. The ceasefire deadline on Wednesday will not produce a permanent peace. It will produce further evidence of whether the current managed de-escalation can hold.
Neither event, taken in isolation, will move rates. But both events shape the environment in which the Federal Reserve must make its next decision. An inflation path easing below 3 percent, a labour market visibly softening, and consumers experiencing real wage erosion will eventually generate action. The question is whether that action, when it comes, is seen as credible or as compromised.
For businesses managing currency exposure, the implication is that the dollar's weakness this quarter is unlikely to be a temporary phase driven purely by geopolitical events. It is a re-rating driven by a visible shift in the expected path of US monetary policy and by growing questions about the institution that sets that policy.
Sterling and the euro are beneficiaries of that re-rating, but they are passive beneficiaries. Their strength is a reflection of dollar weakness rather than domestic outperformance. That matters for hedging strategy. Positions taken on the view that sterling or the euro will continue to strengthen indefinitely are, in effect, positions taken on the view that the dollar will continue to weaken. The durability of that view depends on what happens at the Federal Reserve over the next six months, not on what happens in the Strait of Hormuz.
Today is the start of that story, not the end of it.
Today, at 10am Eastern Time, Kevin Warsh appears before the Senate Banking Committee for his confirmation hearing as the proposed next Chair of the Federal Reserve. The hearing itself is procedurally constrained, since Republican Senator Thom Tillis has publicly committed to blocking the nomination. But what matters for currency markets is not whether Warsh is confirmed today. It is what his arrival signals about the path of US interest rates through the end of 2026 and into 2027.
The dollar has already begun to reflect this shift. The Dollar Index sits near 98, its lowest level since before the conflict began at the end of February. It has fallen for three consecutive weeks, reflecting in part the usual unwinding of safe-haven premium as geopolitical risks ease. But the scale and persistence of the decline suggests something further is at work. The underlying case for a softer dollar was building before the conflict began, and that case is reasserting itself now that the geopolitical overlay is fading.
Understanding why this matters for sterling and the euro, which have both been strengthening against the dollar as a result, requires moving past the noise of today's hearing and focusing on the substance: where rates are actually heading, why, and how quickly.
The Rate Path Hidden in Plain Sight
The federal funds rate currently sits in a range of 3.50 to 3.75 percent. The neutral rate, the level at which monetary policy neither stimulates nor restrains the economy, is generally estimated at between 3.00 and 3.25 percent. Policy is therefore running approximately fifty basis points above neutral.
That single fact frames the entire rate debate. The Federal Reserve is not tight in any historically extreme sense. It is modestly restrictive. The question over the next twelve months is not whether to cut, but when, and in response to what. Crucially, that question has nothing to do with political pressure from the White House. It is simply the mechanical consequence of an economy where inflation is expected to peak in the coming months and then moderate, while growth is being dragged by the same shock that caused that peak.
The substantive case for one rate cut by the end of 2026 rests on three connected observations.
First, the inflationary impulse from the oil shock is likely to peak in the coming months rather than accelerate further. The March CPI reading of 3.3 percent was driven almost entirely by energy, with gasoline alone accounting for nearly three quarters of the monthly increase. Core inflation came in at 2.6 percent, below market expectations. Provided oil stabilises below $100 per barrel, which looks increasingly plausible given the ceasefire dynamics and the potential for new South American supply to come online at sustained higher prices, headline inflation should end 2026 closer to 2.5 to 2.75 percent, with a further decline toward the low 2s expected through 2027.
Second, the same oil shock that pushed inflation higher is beginning to weigh on growth. Higher petrol prices reduce discretionary consumer spending. Higher input costs compress corporate margins. The cumulative effect on consumer demand becomes visible with a lag, and that drag is only beginning to appear in the data. The tariff pass-through that has been working through US goods prices over the past year adds a separate, compounding drag on household real incomes.
Third, the labour market signal is increasingly pointing toward easing rather than tightening. This is the most important observation for anyone trying to anticipate the Fed's next move.
When Job Losses Outpace Inflation
The March jobs report showed a headline nonfarm payroll gain of 178,000, stronger than expected, with the unemployment rate edging down to 4.3 percent. On the surface, this looks resilient. Beneath the surface, it is not.
The household survey showed 64,000 fewer people holding jobs in March. The labour force contracted by 396,000 as workers withdrew after unsuccessful searches. Long-term unemployment remains elevated at 25.4 percent of all unemployed people. The broader U-6 measure of labour underutilisation rose to 8 percent. The quits rate is near historic lows.
Wage growth has slowed sharply. Average hourly earnings rose just 0.2 percent for the month and 3.5 percent from a year ago, the lowest annual increase since May 2021. Because headline inflation rose faster than wages in March, real wages fell by 0.6 percent on the month. For the first time in this cycle, consumers are experiencing visible erosion in purchasing power.
This is the signal that matters for rate policy. If the Federal Reserve sees the labour market softening faster than inflation is rising, it has an economic case for cuts regardless of whether energy prices remain elevated. The central bank responds to the balance between its two mandates, and when one side of that balance begins to tilt decisively, policy has to follow.
The economists at the St Louis Federal Reserve have described the current labour market as being in a "low hire, low fire" state. The language is benign, but the economic reality is that when hiring slows and workers withdraw from the labour force because they cannot find work, aggregate demand falls. Aggregate demand falling is precisely what reduces inflationary pressure over time. It is also what creates the economic justification for rate cuts that a responsible central bank can defend on its merits.
What the Banks Are Pricing
Market participants are split on how quickly this translates into action. The divergence is instructive.
Bank of America's US economist Aditya Bhave has maintained a forecast for two Federal Reserve rate cuts in 2026. BofA sees September as the likely turning point, by which time Warsh should be in place and should have accumulated enough evidence of cooling inflation to build the case for easing. The projected path would bring the federal funds rate to 3.00 to 3.25 percent, the top of the estimated neutral range. According to Bhave, cuts remain the base case because the Fed tends to look through inflation driven by supply shocks, wage pressures remain limited, and political dynamics continue to favour easing.
Goldman Sachs has also forecast two cuts in 2026, though positioning them earlier in the year. JPMorgan has pushed back on the two-cut view, arguing that persistent above-target inflation combined with the oil shock warrants a more cautious approach.
The Federal Reserve's own March dot plot showed the median projected federal funds rate at the end of 2026 at 3.4 percent, implying one cut rather than two. Current market pricing sits between these views. According to CME FedWatch data, futures currently indicate approximately a 77.5 percent probability that the Fed stays on hold through the end of the year, with meaningful probability assigned to one cut.
The dispersion between Bank of America's two-cut view and JPMorgan's no-cut view is unusually wide for a major macro call, and that dispersion itself is part of what is weighing on the dollar. When sophisticated institutions cannot agree on the direction of the most important monetary policy decision in the world, uncertainty is priced into the currency.
Our own reading of the balance of evidence is closer to a single cut by the end of 2026, taking policy to the top of the neutral range rather than into accommodative territory. The logic is straightforward: provided oil stays below $100, inflation should not accelerate to a level that demands a hike, but the drag on consumer demand and the softening labour market should be sufficient to justify moving modestly back toward neutral. A cut under these conditions would not be a pivot to stimulus. It would be a recognition that the economy no longer requires the fifty basis points of above-neutral policy currently in place.
The Warsh Hearing and How It Shapes Interpretation
Today's confirmation hearing matters because it will influence how markets read rate cuts when they eventually come.
Warsh's prepared opening remarks, released on Monday, are a careful exercise in rhetorical positioning. He states that monetary policy independence is essential. He also writes that he does not believe the operational independence of monetary policy is particularly threatened when elected officials, including presidents, state their views on interest rates. The second formulation is important. It creates a framework in which White House pressure on rates is normalised rather than resisted.
Deutsche Bank's research team described Warsh in a note last week as not structurally dovish, noting that his views have tended to skew hawkish relative to others, though his recent rhetoric arguing that artificial intelligence will act as a significant disinflationary force has muddied that characterisation. Chief US economist Matt Luzzetti wrote that Warsh will have to earn market trust and credibility around his commitment to achieving the inflation target, a task made more acute by inflation having been above target for five years, by the recent oil-driven price shock, and by the President's repeated calls for steep Fed rate cuts.
The confirmation process itself faces procedural hurdles. Senator Tillis has committed to blocking the nomination until the Department of Justice concludes or drops its criminal investigation into Powell, which was partially invalidated by a federal judge last month. All eleven Democrats on the Banking Committee are expected to vote no. Without Tillis, the nomination cannot advance. Powell has committed to remaining as chair pro tempore if no successor is confirmed by 15 May. President Trump has threatened to fire Powell if he refuses to step aside.
For currency markets, the critical point is that the interpretation of future rate cuts will be shaped by how this process unfolds. If Warsh is confirmed cleanly and the Fed cuts in response to slowing growth and cooling inflation, markets will likely accept the move as policy rather than politics. If the confirmation is contested, if Powell remains in place past 15 May against the President's wishes, or if the first cut appears to follow a period of visible Presidential pressure, markets will price in an institutional discount even if the underlying economic case for the cut is sound.
This is the real subtext of today's hearing. Not whether rates will be cut, but whether those cuts, when they come, will be seen as credible policy or as political accommodation. The dollar's three-week decline suggests markets are already beginning to price in the second interpretation.
Hormuz in the Background
The ceasefire between the US and Iran expires on Wednesday evening Washington time. President Trump has said an extension is "highly unlikely" without a permanent peace deal. Over the weekend, Iran fired on vessels attempting to transit the Strait. The US Navy seized an Iranian-flagged cargo ship in the Gulf of Oman. On Monday, only three ships transited the Strait, compared with hundreds in a normal day.
Vice President JD Vance is leading a US delegation to Islamabad for a second round of peace talks, though Iranian participation remains uncertain. Oil is trading near $95 per barrel for Brent and $86 for WTI.
These developments matter, but their market impact is now second-order. The first-order question has shifted to the Federal Reserve, the path of US interest rates, and what the institutional transition at the Fed means for the credibility of any rate decisions that follow. Hormuz affects the speed of the inflation retreat. It does not fundamentally change the direction of the rate cycle.
A renewed escalation in the Gulf would of course push oil higher again and complicate the inflation picture. But even in that scenario, the labour market weakness and consumer stress now visible in the data would continue to build pressure for cuts. The energy channel has become one variable among several rather than the dominant driver.
Sterling and Euro Positioning
The dollar's softer tone has lifted both sterling and the euro. GBP/USD has been trading close to 1.35, near an eight-week high, while EUR/USD has held above 1.17, a level it had not consistently reached since February.
The Bank of England meets on 30 April with its base rate at 3.75 percent. A Reuters survey of fifty economists found that forty-five expect a hold, while five expect a 25 basis point hike. UK CPI was unchanged at 3.0 percent in February, with core at 3.2 percent and services at 4.3 percent. The OECD expects UK inflation to reach 4 percent this year, the second-highest rate in the G7 after the United States.
Sterling's recent strength has been driven more by dollar weakness than by UK economic outperformance. The UK growth profile remains subdued, the labour market has softened, and fiscal pressures ahead of the autumn Budget are a background risk. If the dollar's decline pauses, sterling's recent gains could prove fragile.
The European Central Bank also meets on 30 April with its deposit rate at 2.0 percent. The ECB has more room to manoeuvre on rate cuts if inflation proves contained, but the governing council has signalled it will not act prematurely. For EUR/USD, the dominant driver remains the dollar side of the equation. If the dollar's structural weakness continues, EUR/USD could extend gains toward 1.18 or higher. If the dollar stabilises, euro upside is limited by the region's weaker growth profile.
What This Week Actually Changes
The Warsh hearing today will not produce confirmation. It will produce a clearer picture of how the proposed next Fed Chair thinks about the relationship between political pressure and monetary policy. The ceasefire deadline on Wednesday will not produce a permanent peace. It will produce further evidence of whether the current managed de-escalation can hold.
Neither event, taken in isolation, will move rates. But both events shape the environment in which the Federal Reserve must make its next decision. An inflation path easing below 3 percent, a labour market visibly softening, and consumers experiencing real wage erosion will eventually generate action. The question is whether that action, when it comes, is seen as credible or as compromised.
For businesses managing currency exposure, the implication is that the dollar's weakness this quarter is unlikely to be a temporary phase driven purely by geopolitical events. It is a re-rating driven by a visible shift in the expected path of US monetary policy and by growing questions about the institution that sets that policy.
Sterling and the euro are beneficiaries of that re-rating, but they are passive beneficiaries. Their strength is a reflection of dollar weakness rather than domestic outperformance. That matters for hedging strategy. Positions taken on the view that sterling or the euro will continue to strengthen indefinitely are, in effect, positions taken on the view that the dollar will continue to weaken. The durability of that view depends on what happens at the Federal Reserve over the next six months, not on what happens in the Strait of Hormuz.
Today is the start of that story, not the end of it.