The latest inflation and unemployment statistics give the Fed grounds to keep interest rates unchanged for at least a couple of months. A pause in the easing cycle will likely strengthen the US dollar, much to the US president's dismay. Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- US inflation continues to slow down.
- The Fed's policy is well-positioned.
- A pause in the easing cycle strengthens the dollar.
- Short trades on the EUR/USD pair can be opened if the price breaks through 1.163.
Weekly US Dollar Fundamental Forecast
Markets are shifting away from inflation concerns toward the potential impact of a cooling labor market on a strong economy, according to BlackRock CEO Rick Rieder, one of the candidates for the new Fed chair. However, the US central bank has long held this view. It cut the fed funds rate three times in 2025, even amid elevated prices. Nevertheless, Donald Trump has said that Powell is "a bad Fed person" who has "done a bad job."
US Inflation Change
Source: Wall Street Journal.
In December, consumer prices rose by 0.3% month-on-month, and core inflation increased by 0.2%, below 62 of 73 forecasts in a Bloomberg survey. These figures allowed the US president to declare that economic growth was booming, productivity was rapidly increasing, investment was thriving, and inflation had been defeated thanks to tariffs. By the way, revenue from these tariffs totaled $264 billion in 2025, $185 billion more than in 2024. As a result, the budget deficit shrank to $1.67 trillion, the lowest figure in three years.
The US leader also stressed that the country would face significant financial hurdles if the Supreme Court repealed the tariffs. In this case, billions of dollars will have to be returned, and other countries will refuse to invest in the US economy. In fact, tariff costs were borne by American firms and consumers, so the cancellation of tariffs can be viewed as a fiscal stimulus measure, more likely to boost GDP than to slow it. In this connection, it becomes clear why the EUR/USD pair is falling ahead of the Supreme Court's verdict.
The strength of the economy, the stabilization of the labor market, and inflation above the 2% target give the Fed reason to keep rates unchanged. According to St. Louis Fed President Albert Musalem, the rates are at a neutral level, and monetary policy is well-positioned. After the unemployment rate fell to 4.4% in December, CME derivatives have shifted expectations for the resumption of the monetary expansion cycle from March to June, thereby strengthening the US dollar.
More and more traders in the futures market expect the Fed to keep monetary policy unchanged until the end of 2026. If so, the wide spread between US and German bond yields will spell doom for the EUR/USD pair.
EUR/USD Performance and US-Germany Bond Yield Spread
Source: TradingView.
The only person who can prevent the pair from collapsing is Donald Trump. The US president wants to reduce borrowing costs to 1% and is doing everything possible to achieve this. Such rates will not only fuel inflation but also cause capital outflows from the US, sending the dollar tumbling.
Weekly EURUSD Trading Plan
Unemployment and inflation figures give the Fed enough time to wait and see for at least a couple of months. Against this backdrop, short positions on the EUR/USD pair can be increased if the price breaks below the 1.163 support level.
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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