Rumors that the December cut in the federal funds rate would be the final one caused investors to worry. However, inflation data and Fed officials’ remarks have helped alleviate these concerns. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The US PCE index slowed to its lowest level since May.
- FOMC officials continue to insist on rate cuts.
- Donald Trump threatens Europe with tariffs.
- Short trades can be opened on the EURUSD pair if it rebounds from 1.0465 and 1.05.
Weekly US Dollar Fundamental Forecast
The market’s recent fluctuations have led to speculation about the potential ending of the Federal Reserve’s monetary expansion cycle. This speculation was triggered by the December Federal Open Market Committee (FOMC) forecasts. The EURUSD exchange rate experienced a significant decline, reaching its lowest point in two years. However, the slowdown in the US Personal Consumption Expenditure (PCE) index and dovish comments made by central bank officials have forced EURUSD bears to retreat. Even Donald Trump’s threats towards the European Union did not significantly impact the euro’s value.
In November, the growth rate of the PCE index fell to 0.1%, marking the lowest level since May. The core PCE, anchored at 2.8% y/y, showed the same trend in monthly terms. New York Fed President John Williams has advocated for additional rate cuts, while San Francisco Fed President Mary Daly considers the FOMC’s projection of two reductions in the monetary expansion trajectory by 2025 reasonable. Austan Goolsbee of the Chicago Fed anticipates a decline in borrowing costs within the next 12 to 18 months.
US Inflation Change
Source: Bloomberg.
Despite comments from Beth Hammack, who voted to maintain the federal funds rate at 4.75% in December, investors remained undaunted. The president of the Federal Reserve Bank of Cleveland asserts that, given the proximity of the neutral rate level, the likelihood of further rate hikes will hinge on progress in addressing inflation. This assertion, in turn, does not preclude the possibility of monetary policy easing in January, particularly in light of the recent slowdown in the PCE to 0.1%. Derivatives have reduced the likelihood of a Fed pause from 95% to 89%.
In conjunction with the growth of US Treasury yields and stock indices, this has sparked bullish sentiment in the EURUSD pair. Even Donald Trump’s statement that if Europe does not increase its oil and gas purchases from the US, he will impose tariffs did not cause alarm.
According to EU data, the US has a foreign trade deficit in goods with the bloc of €155.8 billion, equivalent to $162 billion. This situation is likely a concern for the president-elect. However, his statement appears inconsistent with the European Commission President Ursula von der Leyen’s intention to phase out Russian gas in favor of American gas. Notably, the US accounts for 48% of LNG supplies to Europe, compared to Russia’s 16%.
US Foreign Trade
Source: Wall Street Journal.
Despite the fact that EURUSD bears have retreated, they continue to maintain a strong hold on the market. HSBC has not observed any indications that would suggest a weakening of the USD in 2025. Manulife Investment Management has stated that further evidence is necessary before they can confidently predict a decline in the USD index, as there are currently no clear signs of a global economic recovery. Wells Fargo has noted that Donald Trump’s fiscal stimulus and tariffs could potentially bolster the US dollar. On the other hand, Deutsche Bank has predicted a decline in the major currency pair to parity.
Weekly EURUSD Trading Plan
Against this backdrop, short trades can be opened on the EURUSD on a rebound from resistance levels of 1.0465 and 1.05.
Price chart of EURUSD in real time mode
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