The US dollar notched its best daily performance in two months amid geopolitical factors, plunging stock indices, strong US labor market data, and expectations of a Fed rate hike. Even Donald Trump could not derail the rally. Let's discuss this topic and build a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US labor market is strong.
- The markets expect the Fed to raise interest rates.
- Israel and Iran are attacking each other again.
- Short trades on the EUR/USD pair can be opened with a target of 1.146.
Weekly Fundamental Forecast for Dollar
US employment is growing at its fastest pace since March 2024, the stock market is falling on fears of a federal funds rate hike, and a geopolitical conflict is escalating in the Middle East. The US dollar has strong tailwinds. The USD index is posting its best daily performance in two months, proving speculators right as they build up net long positions in the greenback.
Speculative Positions on US Dollar
Source: Bloomberg.
The slowdown in US employment toward the end of 2025 prompted the Fed to ease monetary policy. The prevailing market view was that the US did not need the impressive nonfarm payrolls data seen in previous years to sustain strong GDP growth. An increase of 70,000–80,000 per month was deemed sufficient. In March–May, the figure jumped to an average of 188,000, the highest level in two years.
US Nonfarm Payrolls
Source: Wall Street Journal.
It turns out that the slowdown in employment at the end of last year was the economy's reaction to tariffs, anti-immigration policies, and massive government downsizing. The slowdown in labor market growth may be just as temporary as the rise in inflation. If so, the Fed would tighten monetary policy rather than ease it.
Donald Trump, of course, disagrees with this. The US president was honestly surprised by the stock market crash. In his view, the S&P 500's decline was driven by fears of a Fed rate hike, and there was no reason to tighten monetary policy. After all, the US labor market expands, and the economy is not inflationary; therefore, interest rates should be lowered.
However, economic theory suggests otherwise. Several years ago, Turkish President Recep Tayyip Erdoğan and his controlled central bank attempted to boost GDP by easing monetary policy. This led to runaway inflation and a currency crisis.
Donald Trump's wishful thinking does not match reality. This also applies to the situation in the Middle East, where the conflict has escalated. Hezbollah rejected the terms of the ceasefire demanded by the US and attacked Israel. Israel responded with strikes on Beirut and faced Iranian retaliation—rockets fired at its territory. In a region where silence in response to an insult is considered a sign of weakness, a retaliatory strike was inevitable.
Against this backdrop, Donald Trump's statement—"You fired your missiles, that's enough. Go back to the negotiating table and make a deal"—appears as yet another example of the US president's detachment from reality, just like his words that "Netanyahu will have no choice but to accept a deal with Iran. He doesn't decide, I decide."
Weekly Trading Plan for EUR/USD
The combination of a strong US labor market, geopolitical tensions, a falling S&P 500, and a potential Fed rate hike is driving the EUR/USD pair toward the bearish target of 1.146. The first target at 1.154 has already been reached. Short trades remain a viable strategy.
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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