It seemed that the rally of the EUR/USD at the end of January was detached from reality. The pair was sensitive to comments from the US president and Treasury Secretary, ignoring macro statistics and the Fed. How long will this trend continue? Let's discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The US dollar is rising thanks to Kevin Warsh.
- Donald Trump insists on lowering interest rates.
- Markets have moved away from fundamentals and are now driven by emotions.
- Short trades on the EUR/USD pair can be opened below 1.193 and 1.1895.
Weekly US Dollar Fundamental Forecast
Markets are driven by emotions. Donald Trump said that the fall of the US dollar is great. As if no one knew before that his administration wanted to devalue the currency. It was common knowledge, but all the fuss surrounding the coordinated currency intervention by the US and Japan, along with historical parallels with the Plaza Accord, prompted investors to sell off the greenback en masse. The market did not want to miss out on the acceleration of the upward trend in EUR/USD quotes. Now investors are wondering if they were too hasty.
The markets are so confused by the US administration's policies that they see Kevin Warsh's likely appointment as Fed chair as a reason to buy the US dollar because the FOMC governor acted like a hawk in the past. However, if Warsh supported a long pause in the cycle of monetary expansion, he would not be Donald Trump's preferred candidate, as the prediction markets suggest.
Fed Chair Nominee Odds
Source: Bloomberg.
Moreover, the US leader once again failed to control his anger and displayed his discontent with the Fed's inaction in January. According to him, due to the huge amount of money coming into the country from tariffs, the US should have the lowest interest rate in the world, about 2 or even 3 points lower than it is now! Notably, Switzerland holds its interest rate at zero.
Most likely, Kevin Warsh's appointment is part of the game to get Trump's candidate through Congress. There, Republicans, outraged by the Justice Department's lawsuit against Jerome Powell, were determined to block any nomination. The supposedly "hawkish" Warsh may be able to get through these rough waters. It is only then that he will appear before the public as a "dove" the country has not seen since Arhur Burns.
The markets need to calm down, deal with their emotions, and start asking themselves the right questions. Even if Donald Trump wants to weaken the US dollar and drop rates to 0.75%, how can he do that? Decisions at the Fed are made collectively, and Lisa Cook will most likely keep her post. Moreover, Jerome Powell will likely remain on the board. Otherwise, he would show that he has given in to political pressure.
Personally, I would buy the dollar simply because sooner or later, markets will return to fundamentals. The strength of the US economy and the Fed's hands-off approach are powerful advantages. At the same time, it is difficult to say when exactly investors will move away from emotions, FOMO, or buy-or-lose mentality towards the EUR/USD pair.
Weekly EURUSD Trading Plan
It remains to wait for the major currency pair to approach the 1.193 level, acting as the line in the sand. If the price settles above this level and grows toward 1.1975, long positions can be opened. On the contrary, if EUR/USD quotes slide below the critical level and drop toward the support level of 1.1895, short trades can be considered.
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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