The US Federal Reserve is comfortable with the current interest rate. While it was considered too high before the pandemic, it is currently suitable for the US economy. Against this backdrop, investors are turning to the dollar. Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The odds of pro-Trump candidates becoming Fed chair are falling.
- Investors do not expect sharp rate hikes until a new central bank chief is appointed.
- The US labor market is stabilizing.
- Short trades can be considered as long as EUR/USD quotes are trading below 1.163.
Weekly US Dollar Fundamental Forecast
The investigation into Jerome Powell has distanced candidates close to Donald Trump from the position of Fed chair. Republican Senator Thom Tillis said he would not appoint his mother to the post under the current conditions. Kevin Hassett is no longer the frontrunner, and the growing chances of Christopher Waller, who is not part of Donald Trump's camp, may help EUR/USD bears.
According to JP Morgan, the Fed may refrain from lowering rates in 2026. Morgan Stanley, Barclays, and Citigroup have shifted the timing of monetary expansion to a later date because the US economy is strong, inflation is still above target, and the labor market is stabilizing. In such conditions, it makes no sense to ease monetary policy.
Fedspeak Index Showing Hawkish and Dovish Bias in Fed Officials' Speeches
Source: Bloomberg.
This sentiment is supported by comments from FOMC representatives. San Francisco Fed President Mary Daly believes that monetary policy is in a favorable position. Anna Paulson of Philadelphia feels comfortable with the current interest rate level. Atlanta Fed President Raphael Bostic suggests that the central bank should not act hastily. Austan Goolsbee from the Chicago Fed notes that the main goal is to bring inflation back to 2%, while Jeff Schmid from the Kansas City Fed argues that current rates are not hampering economic growth. As a result, the barometer of hawkish and dovish speeches by Fed officials has risen to its highest level since April, supporting a bearish outlook for the EUR/USD pair.
Moreover, the Fed's decisions depend on data, and statistics show that the labor market is gradually recovering. Unemployment claims fell to 198,000 in the week ending January 10. The actual figure was lower than any of the Bloomberg experts' forecasts, and its four-week average fell to a two-year low.
Likelihood of Several Rate Cuts by Fed
Source: Wall Street Journal.
Meanwhile, the futures market reduced the probability of three or more rate cuts in 2026 from 43% to 32%. In contrast, the probability of one or fewer Fed cuts jumped from 26% to 37%. Investors believe that there will be no cuts until the new Fed chairman is appointed. Jerome Powell will step down in May, and the chances of a rate cut in June are about 65%.
Weekly EURUSD Trading Plan
The Fed's decision to keep interest rates unchanged until summer, coupled with signs of stabilization in the labor market, is dragging EUR/USD quotes lower. The 1.163 mark has become a key resistance level. As a result, short positions on the euro against the US dollar opened near this level can be maintained and increased.
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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