After a weak 2025, the US dollar began to recover at the start of the year, supported by a prolonged pause in the Fed’s monetary expansion cycle. Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Recent developments in Venezuela did not shake the markets.
- The US dollar recorded its worst performance since 2017.
- Investors are awaiting employment data.
- Consider short trades as long as the EURUSD pair trades below 1.171.
Weekly US Dollar Fundamental Forecast
Despite the dramatic nature of the event, financial markets showed little reaction to the US detention of Venezuela's president. This indifference is easy to explain. In the 1970s, Venezuela accounted for about 1% of global GDP. Today, its share is closer to 0.1%. Half a century ago, the country produced around 3.5 million barrels of oil per day, compared with roughly 1 million now, making it only the world's 18th-largest oil producer. Against this backdrop, investors are increasingly shifting their focus back to the Fed and the US labor market.
US Dollar Spot Index Change
Source: Bloomberg.
Donald Trump's policies sometimes clash with his own goals. He favors a weaker dollar alongside a strong S&P 500, and in 2025 that combination seemed to work, with the greenback posting its worst performance since 2017. In 2026, however, a repeat looks unlikely. A roughly 9% decline in the USD index was a key factor behind the outperformance of non-US equities relative to US stocks. However, further weakness could trigger more capital outflows from the US. As a result, stock indices may not reach the levels the administration wants.
The same inconsistency appears in Donald Trump's other priorities. A strong economy combined with low interest rates would inevitably fuel inflation, something the Fed, at least in its current composition, is unwilling to tolerate. As these tensions persist, the EUR/USD pair's reaction to the December US employment data will indicate the pair's likely direction.
Average Employment and Unemployment Trends in the US
Source: Bloomberg.
According to Bloomberg, nonfarm payrolls are expected to increase by 60,000, while the unemployment rate is expected to decline from its recent peak to 4.5%. As Atlanta Fed President Anna Paulson noted, the labor market is cooling, but not deteriorating. Monetary policy remains mildly restrictive, meaning that even if the Fed eventually cuts rates, it is likely to wait some time before doing so. The central bank first needs clear evidence that inflation is firmly under control.
The derivatives market indicates just a 17% chance of further policy easing in January and less than 50% in March. The most likely outcome is that US interest rates remain unchanged until spring. The yield gap with Europe is still wide enough to attract capital flows into the US. This, in turn, points to a potential correction in EUR/USD.
Investors who bet on a wide gap between US and German bond yields and sold the main currency pair toward the end of the year were right. The question now is how deep the pullback will be.
Weekly EURUSD Trading Plan
Consider holding the short trades opened at 1.1795 and 1.175 as long as the euro is trading below $1.171, the key resistance level. However, if the price breaks below the support of $1.1655, the asset may plunge further. Therefore, new short trades can be considered near this zone.
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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