The US Fed is not expected to cut interest rates before September in an effort to clarify the ongoing trade tensions. In such conditions, markets shift their focus from economic data to fiscal issues. Let's discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The divergence in PMIs has only temporarily supported the US dollar.
- The Fed will cut rates if the tariff dispute is resolved.
- The Treasury market dislikes the US President's plan.
- Long trades could be opened after the EURUSD pair rebounded from 1.125.
Weekly US Dollar Fundamental Forecast
The US dollar is holding its ground, but the sell-off in the US is so strong that EURUSD bears can abandon their high hopes. It seemed that they had taken the initiative in response to the divergence in economic growth between the US and the eurozone, as indicated by PMI data and the House of Representatives' passage of Donald Trump's tax cut bill. However, the Treasury market has soured on the news, leading to a sell-off in stocks and the greenback.
For many years, monetary policy divergence and varied economic growth rates have been pivotal factors in the Forex market. However, the divergence in the PMI temporarily led to a decline in the EURUSD pair. The US composite purchasing managers' index came in better than expected, while its European counterpart fell to a six-month low in May.
Euro-Area PMIs
Source: Bloomberg.
Currently, markets are prioritizing concerns regarding trade wars and fiscal policy over macroeconomic reports. The Fed plans to adopt a wait-and-see approach until at least September when the situation with tariffs becomes clearer. According to FOMC member Christopher Waller, if import duties against US trading partners are settled at around 10% following the 90-day delay, the central bank will be able to resume its monetary expansion cycle in the second half of the year responsibly.
The Fed has temporarily stepped aside, and investors are now directing their attention to fiscal policy. According to Christopher Waller, Treasury yields are rising because markets are concerned that there will be no significant efforts to reduce the budget deficit. The "Big, Beautiful Bill" that passed in the House of Representatives may increase the budget deficit by $2.7 trillion over the next decade.
30-Year US Treasury Bond Yield
Source: Bloomberg.
Following the downgrade of the US credit rating, Moody's has stated that the country's public debt is expected to rise from 100% to 134% of GDP by 2035. In his address to Congress in March, President Trump committed to balancing the budget in the near future. Despite this commitment, the bill that was passed by Congress actually expanded the deficit. The gravity of this situation is undeniable.
According to Deutsche Bank, the US fiscal problems will have a greater damaging effect on the US dollar than on Treasuries. Eventually, US investors will resume purchasing Treasury bonds, which have decreased substantially. However, non-residents will likely lose interest in US securities. Meanwhile, the demand for the US dollar is waning, enabling the EURUSD pair to rally.
Weekly EURUSD Trading Plan
In light of these developments, the most effective approach is to maintain the strategy of buying the major currency pair on pullbacks. The recent rebound of the EURUSD pair from the support level of 1.125 provided a solid opportunity to increase previously formed long trades.
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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