After the Federal Reserve cut the federal funds rate in September and October, the US dollar strengthened. At that time, the limited scope for the Fed's monetary expansion and expectations of a pause made a difference. What will happen this time? Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The odds of the Fed rate cut in December have increased.
- In the two previous cases, the US dollar strengthened.
- Investments in AI are boosting the US economy.
- Long and short trades can be opened at 1.155 and 1.15, respectively.
Weekly US Dollar Fundamental Forecast
The likelihood of a cut in the federal funds rate is decreasing, and the EUR/USD rate is falling, showing no signs of growth. With the ECB on the sidelines due to the end of the monetary expansion cycle, the euro's exchange rate against the US dollar is in the Fed's grasp. However, markets move based on expectations, and the central bank has two options for further action: cut and keep the rate unchanged, or pause and then cut the interest rate.
Ahead of New York Fed President John Williams's speech, markets were confident in the second option, suggesting that the lack of data would make the Fed cautious. Jerome Powell said that, when moving in a fog, you need to slow down. The turning point came with the publication of the minutes from the October FOMC meeting, which revealed a dominant hawkish stance. As a result, the odds of a sharp cut in the federal funds rate in December dropped to 28%.
Fed Funds Rate Trajectory
Source: Wall Street Journal.
This, however, was a worst-case scenario for the US dollar. The pause at the end of the year resulted in dovish rhetoric from the Fed. Hints of monetary policy easing would make the greenback vulnerable. Against this backdrop, long positions on the EUR/USD pair could be opened on drawdowns.
John Williams's speech turned everything upside down. The New York Fed President said that rates could fall in the near future. Christopher Waller followed with a speech. The FOMC official insisted on continuing the cycle of monetary expansion in December because the risk of a sharp rise in unemployment outweighed the likelihood of accelerating inflation. In addition, San Francisco Fed President Mary Daly also shared this perspective. As a result, the likelihood of a December cut increased to 80%. Now, investors believe the US regulator will likely cut rates and then keep them unchanged. This scenario is more beneficial for the US dollar than the alternative.
As a rule, expectations are driving market growth. Typically, the US dollar strengthens following monetary policy easing. For example, after the Fed cut the rate in September and October, the greenback surged. Initially, it was bolstered by the limited room for easing, and later by the prospect of a pause in the cycle.
Impact of AI-Related Investment on US GDP
Source: Wall Street Journal.
However, inflation is another factor to consider. Technically, it should increase in a strong economy. According to a leading indicator from the Federal Reserve Bank of Atlanta, US GDP growth is expected to reach 4.2% in the third quarter. Without AI, the US economy would undoubtedly perform much worse. Most investment is tied to AI, and the growth of technology company shares is making Americans richer and driving up consumer spending.
Weekly EURUSD Trading Plan
The question of whether the Fed will cut rates in December is still up in the air. Traders should consider both scenarios and set pending orders to buy the EUR/USD pair near 1.155 and to sell the euro at 1.15.
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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