As a rule, markets tend to exaggerate everything, mixing their expectations and reality. However, investors are gradually realizing that Donald Trump’s policy is not so frightening. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Reuters experts anticipate inflation to accelerate in the US.
- The Federal Funds Rate will be cut to 3.75%.
- The market overestimates the Trump trade.
- The EURUSD pair’s trajectory will depend on the battle for the 1.0545 level.
Weekly US Dollar Fundamental Forecast
Given the current economic context, with inflation remaining above the Fed’s target and the potential for further fiscal stimulus and trade barriers from the Republican Party, it is understandable that there is an expectation of continued price increases. According to a recent poll conducted by Reuters, 85% of experts believe that inflation may accelerate again, boosting the US dollar. However, it is not uncommon for forecasts to diverge from actual outcomes. A reassessment of the Trump trade allows the EURUSD pair to remain afloat.
The market narrative suggests that a potential acceleration in consumer prices will force the Fed to slow the monetary expansion cycle, if not pause it. Given the US economy’s performance over the past two years with the Fed Funds rate at 5% or higher, it is reasonable to assume that this trend will continue. FOMC official Michelle Bowman believes that inflation is once again becoming the primary issue for the US regulator rather than the labor market. This shift in focus drove EURUSD quotes to September peaks in the summer.
Fed Funds Rate Change
Source: Bloomberg.
In light of concerns about the prospect of accelerated inflation, Reuters experts anticipate that the Fed will implement three acts of monetary expansion in 2025. This is expected to result in a decline in the federal funds rate to 3.75%, representing a reduction of 50 basis points from the previous forecast.
Fear can be a powerful motivator. The Republican Party gained control of the House of Representatives, but only by a narrow margin. It will be challenging for Donald Trump’s fiscal stimulus to pass. Furthermore, there is typically a time lag between the approval of a bill by lawmakers, its implementation, and the subsequent impact on the economy.
The same is true of trade tariffs. It is anticipated that inflation will increase as a result of supply chain disruptions. However, a stronger dollar, deregulation of the energy sector, and increased oil production could serve to mitigate this process. The Fed has no intention of deviating from its September plans, which will harm the US dollar.
The reassessment of the Trump trade is well underway, with the EURUSD attempting to gain ground at the 1.0545 level. However, a downturn in the eurozone economy could diminish the strength of bulls. The ECB’s Financial Stability Review highlights the potential for a resurgence of the debt crisis. It asserts that US protectionism and elevated interest rates are prompting concerns about sustained high inflation, which could shift focus from inflation to slower economic growth. If this occurs, the deposit rate will likely decline, leading to a weaker euro.
The eurozone will be particularly vulnerable to Donald Trump’s tariffs, given that it sells more goods to the US than it buys from it.
Euro Area’s Trade Balance with US
Source: Bloomberg.
Weekly EURUSD Trading Plan
The overestimation of the Trump trade buoys the EURUSD, yet the divergence in economic growth persists. The battle for the 1.0545 level continues, and if bears emerge victorious, the pair will continue its decline towards 1.035.
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. 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 2004/39/EC.
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