The probability of a 50-basis-point cut in the ECB rate in December is declining, as is the likelihood of the federal funds rate remaining at 4.75%. Consequently, the EURUSD exchange rate is increasing. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The US prefers negotiations to tariffs.
- There will be no winners in trade wars.
- The ECB will not aggressively cut rates in December.
- Short positions can be opened if the EURUSD fails to settle above 1.06.
Weekly US Dollar Fundamental Forecast
The market is increasingly convinced that Donald Trump’s threats are worthless. His preference for negotiating at gunpoint is making the US dollar retreat. The greenback is poised to post its weakest week in three months amid a Trump trade overvaluation, investment portfolios rebalancing in late November, speculators closing excessive longs, and falling Treasury yields.
US Dollar Performance and Speculative Positions
Source: Bloomberg.
The EURUSD pair’s pullback was driven not by German inflation anchored at 2.4% in November or the improvement of economic sentiment in Europe but by Donald Trump’s announcement of a negotiation with Mexican President Claudia Sheinbaum about combating drug smuggling and migration. Before this, Trump had indicated his intention to impose a 25% tariff on neighboring countries, effectively limiting their room for maneuvering in negotiations.
Inflation in Germany
Source: Bloomberg.
Christine Lagarde also discussed the importance of engaging in constructive dialogue with the new US President. Nobody wants to engage in reciprocal action and wage trade wars. It is unlikely that any party will emerge as the clear winner if retaliation is employed. Furthermore, it is unclear how the United States can achieve its goal of becoming great again if global demand falls due to protectionist policies.
Meanwhile, a batch of robust data on Spanish and German inflation, European economic sentiment, and a generally neutral stance from Governing Council members reduced the likelihood of the ECB cutting the deposit rate by 50 bps in December from 50% to 12% following eurozone business activity statistics. The Trump trade retreat and the resulting growth in EURUSD quotes are contributing factors. Against this backdrop, the likelihood of the federal funds rate remaining unchanged at the upcoming FOMC meeting in 2024 has decreased from 46% to 33%.
The euro may appreciate further if inflation in the currency bloc exceeds the 2.3% forecast by Bloomberg experts. However, EURUSD bulls should be aware of potential challenges ahead. In early 2025, consumer prices in Germany and the eurozone are likely to decline due to economic weakness and labor market deterioration.
In contrast, US employment statistics for November are expected to be robust, following weaker data for October. This could lead to a pause in the Fed’s monetary expansion cycle and strengthen Treasury bond yields, potentially benefiting the US dollar.
Weekly EURUSD Trading Plan
Markets are rising on expectations, so the EURUSD pair will likely decline before the data is released. In this regard, long trades can be opened during a rally to $1.0615 and $1.07, followed by a pullback, creating an opportunity to form short trades. If bulls fail to breach 1.06 after the release of the EU inflation data, traders can open short positions on the major currency pair.
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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