The EURUSD pair plummeted on fears that US employment would recover in September after a summer slump. However, a shutdown of the US government will delay the publication of the labor market report. Bulls are expected to feel encouraged. Let's discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- A shutdown will heighten market uncertainty.
- The Fed aims to balance risks.
- The ECB has finished its cycle of monetary expansion.
- Long positions on the EURUSD pair can be considered on a breakout of 1.1745.
Weekly US Dollar Fundamental Forecast
Flying a plane in thick fog sounds like something you definitely do not want to do. The US government shutdown will delay the publication of important data on the labor market and inflation. This will prevent investors from assessing the state of the US economy and what decisions the Fed may take. Hopes for an agreement between Democrats and Republicans are fading by the minute. Polymarket gives a 73% chance that the shutdown will happen.
Odds of US Government Shutdown
Source: Wall Street Journal.
The markets will have no choice but to navigate through thick fog, relying mainly on the sounds around them. More precisely, on the statements made by central bank officials. Investors have become accustomed to Stephen Miran's loud statements that the Fed should save the US economy by lowering the federal funds rate to a neutral level as quickly as possible. However, John Williams' moderately dovish rhetoric came as a revelation to them.
According to the New York Fed President, the effects of tariffs on the PCE were less than expected. There were no signs of accelerating inflationary pressures, but a rebalancing of risks did occur. Previously, inflation posed a greater threat, but now its risks and those of the labor market have converged. In such conditions, lowering the federal funds rate appears reasonable.
Market Expectations for Fed Funds Rate
Source: Bloomberg.
A re-evaluation of market perspectives on the outlook for the federal funds rate prompted EUR/USD bears to drag the price lower at the end of September. However, Jerome Powell, John Williams, and other supporters of a prolonged pause in the cycle have adopted a more optimistic stance, which suggests that monetary expansion will likely continue.
In contrast, the ECB is confident that inflation is under control. Chief Economist Philip Lane has stated that consumer prices are unlikely to return to the lows seen before the pandemic. However, they will not be able to rise significantly above the 2% target. If doves on the Governing Council expected the disinflationary process to continue, the surge in Spain's inflation to 3% has likely soured their outlook.
It appears that the cycle of monetary policy easing by the ECB has likely come to a conclusion. The Fed will continue to cut rates. The process will continue, albeit at a pace that is not in line with the expectations of Stephen Miran, the US administration, and the financial markets. As a result, the EURUSD pair is more likely to rise than to fall sharply.
The release of the US employment report for September is scheduled to be postponed to a later date due to a looming shutdown, and bulls are more likely to benefit from this than their opponents. The latest data on unemployment claims has led to concerns regarding the euro.
Weekly EURUSD Trading Plan
If the EURUSD pair revisits the resistance level of 1.1745, long positions formed at 1.1645 can be increased.
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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