The prolonged pause in the Fed's monetary policy easing cycle and confidence in the strength of the US economy are prompting investors to turn their attention to the US dollar. The euro is struggling, and the EUR/USD pair has come under pressure. Let's discuss these topics and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed will refrain from lowering interest rates until June.
- The US economy is showing encouraging results.
- The US president does not want to dismiss Powell.
- Short trades on the EUR/USD pair can be considered with targets of 1.15 and 1.14.
Quarterly Euro Fundamental Forecast
The labor market is stabilizing, inflation is slowing, and the economy is moving toward 2% growth. Against this background, it is appropriate to slightly ease monetary policy at the end of the year. Philadelphia Fed President Anna Paulson takes this stance, and investors agree with her. The derivatives market gives a 70% probability of a federal funds rate cut to 3.5% in June. The Fed will remain on the sidelines for about five months, setting the stage for the EUR/USD pair's decline.
The US economy is indeed able to deliver pleasant surprises. In 2025, it may well expand by 2.5% even against the dampening effect of tariffs, which have been absorbed by US consumers. Thanks to investments in AI and an impressive rally in US stock indices, consumer spending increased due to the wealth effect. As a result, retail sales grew by 0.6% in December.
US Retail Sales
Source: Wall Street Journal.
The Supreme Court has postponed its verdict on the legality of tariffs for at least a week. There is a high probability that import duties will have to be refunded, which would deal a severe blow to the budget. However, it can also be seen as a large-scale fiscal stimulus. Coupled with the Big and Beautiful Tax Cuts Act, the cancellation of tariffs may boost the US economy. The question is, will inflation accelerate?
The Fed has already made one mistake, believing that tariffs would spur consumer prices. In fact, they had a restraining effect due to a decline in domestic demand. Stephen Miran, a close Trump ally and Fed dove, suggests that rapid GDP growth is possible without fueling inflation. One reason for this could be deregulation, which would increase competition and productivity.
Time will tell who is right. For now, the pause in the Fed's monetary expansion cycle and hopes of faster US economic growth than in the eurozone are allowing EUR/USD bears to dominate the market. All the more so because the TACO trade is stepping in to help them. Donald Trump has backed down again, saying that he has no plans to dismiss Jerome Powell as Fed chairman.
Meanwhile, the euro has nothing positive to offer. According to ECB estimates, US tariffs of 15% will reduce eurozone economic growth by 0.7 percentage points until 2027. Thanks to Germany's fiscal stimulus and increased EU defense spending, the negative impact was mitigated in 2025, but it is unclear what to expect this year and next.
Quarterly EURUSD Trading Plan
In the first quarter, the EUR/USD pair will likely continue to decline towards 1.15 and 1.14, driven by the Fed's wait-and-see approach and the strength of the US economy. In this connection, short trades can be considered. However, the euro may recover its upward trend against the US dollar if there are any changes in the FOMC lineup and the futures market shifts its expectations towards faster monetary expansion.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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