There are clear signs that the US economy is cooling. The Fed must take action to achieve a soft landing. A rate cut in September would be an appropriate response. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Highlights and key points
- Markets expect the Fed to signal a rate cut.
- September is the optimal month for launching monetary expansion.
- The week to August 2 will be eventful.
- The EURUSD risks hovering in the 1.083-1.09 range until the FOMC meeting results are announced.
Weekly US dollar fundamental forecast
Markets are growing on expectations, so signals are more important than the fact that the federal funds rate will be lowered. The July Fed meeting will probably be boring because no changes in monetary policy are likely to be made. However, it will be important because there might be a hint of monetary expansion in September. The EURUSD pair is waiting for a signal from the Fed.
Despite the impressive 2.8% GDP growth in the second quarter, there are plenty of signs that the economy is cooling. Americans are taking longer to find new jobs, unemployment is rising, small businesses are feeling the pain of costly credit, and the debt of low-income households is snowballing. Investors believe consumer spending will slow significantly in the year’s second half amid a depletion of pandemic savings, a cooling labor market, and an increasing debt burden.
US labor market cooling
Source: Bloomberg.
The Fed should cut rates to help the US economy. It also needs to communicate better with the financial markets. The markets think the Fed will ease policy in the fall, which makes sense. It should be done in September because there will be no FOMC meeting in October. In November, after the election, they will say the Fed gave in to political pressure. Waiting until December is not an option, as keeping borrowing costs unchanged for a long time could hurt the US economy.
Investors are waiting for signals in July. What might they be? There can be statements on progress in fighting inflation. The Fed says the PCE index will continue to move toward the target. High prices are not the only risk the economy is facing. The cooling labor market also matters. Any of these statements will make the market believe in three acts of monetary expansion in 2024. As a result, the EURUSD will increase.
US Fed rate cut expectations
Source: Bloomberg.
The Fed meeting is the week’s main event, but others could also affect the markets. The releases of European GDP data for the second quarter, EU inflation for July, and US employment data may also greatly impact currency pairs.
Weekly EURUSD trading plan
The EURUSD baseline scenario is consolidation in the 1.083-1.09 range ahead of the July FOMC meeting. However, breakouts of the resistance levels of 1.0885 and 1.0905 could trigger a premature rally. Against this backdrop, it is better to stay out of the market or catch buying signals.
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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