The US president is urging a reduction in the federal funds rate, and it is likely that demand will be met. However, the methods he is employing are causing investors to lose confidence and leading to a decline in the US dollar. Let's discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The US administration is putting pressure on the Fed and the BLS.
- A Fed rate cut will help the global debt market.
- Loss of confidence will weaken the US dollar.
- The euro can be purchased with the targets of 1.182 and 1.194.
Weekly US Dollar Fundamental Forecast
The US administration intends to publish a critical report on the BLS, and Scott Bessent calls for an honest, independent, and impartial review of the Fed's activities. Which, allegedly, needs to restore its lost independence. Both documents could become Donald Trump's primary weapons. Coupled with expectations of a resumption of the Fed's monetary expansion cycle, this gives the green light to the EURUSD pair's rally.
Meanwhile, UniCredit believes that the euro's rally will be limited. That is, the quotes already reflect market expectations of three Fed rate cuts before the end of the year and none for the ECB. If US inflation accelerates, the federal funds rate cuts may be smaller, and the EURUSD pair will likely retreat.
Market Expectations for Fed Interest Rate
Source: Wall Street Journal.
However, the US dollar faces challenges beyond monetary policy divergence. Reports from the US administration on the effectiveness of the BLS and the independence of the Fed could provide President Donald Trump with the opportunity to dismiss officials, fill vacancies, manipulate data, and implement aggressive rate cuts.
A loss of confidence in US macro statistics will result in increased financial market volatility, higher bond yields, and slower economic growth. At the same time, eroding confidence in the Fed could also severely damage the US dollar, as Donald Trump wants to see the federal funds rate fall by 300 basis points.
However, expectations that the Fed will continue its monetary expansion cycle buoy the global economy. They mitigate the adverse effects of financial concerns. The resignation of Japanese Prime Minister Shigeru Ishiba, the vote of no confidence in François Bayrou's government in France, and concerns that Rachel Reeves may face headwinds in achieving a balanced budget are contributing to an increase in long-term bond yields worldwide. Conversely, two-year rates are declining, driven by speculation that the Fed will adopt a more accommodating monetary policy.
Global Bond Index
Source: Bloomberg.
As a result, the yield curve rises, and after its inversion, it will signal an approaching economic downturn. Given the accelerated cooling of the US labor market, this is quite a probable scenario. The Federal Reserve Bank of New York's latest survey of consumer expectations revealed that the expected probability of securing a new position following the loss of a previous one has decreased to 44%, the lowest figure recorded since the beginning of data collection.
Weekly EURUSD Trading Plan
In contrast, Americans' inflation expectations remained firmly anchored at three and five years. This gives the Fed room to continue its easing cycle and allows traders to continue buying the EURUSD pair with the targets of 1.182 and 1.194.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
