Donald Trump announced Stephan Miran as the new Federal Reserve governor, which temporarily weakened the US dollar. Miran replaces Adriana Kugler, who resigned unexpectedly, and will serve until January, though reappointment is possible.
Miran, currently Chairman of the Council of Economic Advisors, has previously opposed the notion that tariffs cause inflation and argued that interest rates are too high. His views might support a shift towards a more dovish monetary policy, aligning with recent votes by Christopher Waller and Michelle Bowman to lower the key interest rate.
Complex Tenure and Challenges
His short tenure complicates discerning which of his opinions align with the apolitical nature of a Fed governor. This could result in unrest within the Fed, making communication challenging amidst potential interest rate cuts. The new appointment’s effects align with a forecast of a higher EUR/USD rate, reflecting longer-term evaluations.
With Stephan Miran’s appointment, we are seeing a clear signal of a more dovish Federal Reserve ahead. Market-based probabilities have already shifted, with Fed funds futures now pricing in a 65% chance of a rate cut at the September FOMC meeting, up from just 40% last week. The US dollar has reacted as expected, with the EUR/USD pair breaking decisively above the 1.10 level for the first time since March.
The uncertainty surrounding Miran’s short tenure and his alignment with the Fed’s apolitical mandate is creating significant market nervousness. We have seen the MOVE index, which tracks bond market volatility, surge by over 15% since the announcement. This suggests we should consider buying options straddles on interest-rate-sensitive assets, such as Treasury note futures, to profit from the expected increase in price swings.
Dollar Direction and Economic Data
We believe the path of least resistance for the dollar is lower in the coming weeks. Miran’s stated preference for lower rates, combined with similar recent votes from governors Waller and Bowman, reinforces a directional bias. We should look at buying near-term call options on the euro or other major currencies against the dollar, recalling the period in 2019 when similar political pressure preceded Fed rate cuts and dollar weakness.
Upcoming economic data will be viewed through this new political lens, making market reactions more extreme. July’s core CPI, which cooled to 2.8%, might now be enough justification for a cut, especially as the latest Non-Farm Payrolls report came in at a weaker-than-expected 150,000. Every piece of Fedspeak, particularly from Miran, will be intensely analyzed, making derivatives tied to specific FOMC meeting dates highly active.
