EUR/USD remains on a roller coaster. Is this all about monetary policy? Or is a new narrative taking shape in the FX market, one that could reshape the fate of the US dollar? Let's explore it and make a trading plan for EUR/USD.
The article covers the following subjects:
Major Takeaways
- Fed officials' speeches are reshaping views on the dollar.
- The euro is struggling due to economic weakness.
- News around Venezuela and Greenland is supporting the greenback.
- Short EUR/USD positions opened at 1.1795 and 1.175 should be held.
Weekly Fundamental Forecast for Dollar
After a prolonged lull, the market has woken abruptly. It is unclear whether the Forex market has grown overly sensitive due to the lack of data during the shutdown, or whether a new narrative is emerging that could fundamentally reshape the future of the US dollar. The choppy EUR/USD moves at the start of the year suggest investors are reassessing their views as new information comes in, trying to make sense of a fast-moving stream of events.
The idea that the greenback has become more data-sensitive is supported by its drop after weak manufacturing activity data and Neel Kashkari's dovish tone. However, the very next day, Thomas Barkin's comment that rates are already at a neutral level and likely to stay there for some time reduced the odds of a March rate cut from 51% to 45%. The US dollar strengthened.
Markets largely ignored Stephen Miran's remarks about restrictive monetary policy and the need to cut borrowing costs by 100 basis points or more. He is closely associated with Donald Trump, and whether the US president will be able to reshape the FOMC in 2026 remains an open question.
Inflation Trends in Germany
Source: Bloomberg.
The euro was pressured by several factors: Germany's inflation slowing from 2.6% to 2.0% in December, strengthening the ECB's doves; Friedrich Merz's comments that some sectors of the German economy are in critical condition; and the revival of concerns around a political crisis in France. The French finance ministry warned that without parliamentary approval of the budget, the deficit could reach 5.4% of GDP, despite the need to bring it below 5%. According to JP Morgan, Paris, Vienna, and Brussels face a 50% risk of a credit rating downgrade in 2026.
If the Fed has effectively put rate cuts on hold, while economic weakness, partly driven by politics, forces the ECB back toward monetary easing, the outlook for EUR/USD may turn less optimistic than many expect. Especially as the risk of diplomatic failure in efforts to end the war in Ukraine is rising.
The US is demanding a full political overhaul in Venezuela: exclusive cooperation with Washington and a break in ties with China, Russia, Iran, and Cuba. Donald Trump has said India dislikes tariffs and is cutting imports of Russian oil. Moscow, in response, has sent a submarine toward Venezuela's shores.
Add to this the risks surrounding Greenland and the president of Colombia, and it begins to look like a new "peace through strength" doctrine is taking shape. This development could weigh on the global economy and trigger a move into the US dollar.
Weekly Trading Plan for EUR/USD
Buy the greenback and hold it — this principle has once again proven effective. Traders who opened shortEURUSD positions at 1.1795 and 1.175 and held them despite interim rallies are now well rewarded. Others may prefer to wait for the upcoming US labor market data.
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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