Markets are speculating on how the FOMC’s statement will change and how many members will vote for a rate hike in the new forecasts. However, geopolitics and monetary expansion are far more important for the EUR/USD pair. Let’s discuss these topics and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US dollar is weakening due to geopolitical factors.
- The world faces the threat of transatlantic stagflation.
- The Fed will revise its interest rate forecasts.
- Long trades on the EUR/USD pair can be opened above 1.162.
Weekly Fundamental Forecast for Dollar
Investors are less concerned with distant risks than with opportunities to generate returns in the present. While the United States may have opened a geopolitical Pandora’s box by demonstrating its military strength against Iran, it now appears to hold a weaker negotiating position on Iran’s nuclear program than it did before the conflict. For now, however, markets are focused on the prospect of reopening the Strait of Hormuz. Concerns about a potential transatlantic recession remain in the background. Instead, the EUR/USD pair is being driven primarily by diverging monetary policy expectations for the ECB and the Federal Reserve.
Donald Trump has dispelled any doubts. He called the agreement with Iran a done deal. This proved sufficient for stock indices to continue their rally, for Brent to fall below $80 per barrel, and for the US dollar to weaken. Markets have flipped from “buying the dip” to “selling the rip”.
However, Iran is approaching the negotiations on its nuclear program from a much stronger position than it was before the armed conflict in the Middle East. It has weathered the worst—experiencing firsthand American military power, which had previously been the main threat. In two months, the opponents would once again find themselves at an impasse, and the future of the Strait of Hormuz would hang by a thread. However, who cares what tomorrow brings? Today is all that matters!
Market Expectations for Fed Funds Rate
Source: Bloomberg.
In the near future, everything could be turned upside down. For example, in 2026, markets were driven by expectations that the Fed’s monetary expansion cycle would continue following three rate cuts in 2025. The US labor market was flashing warning signs, and the impact of tariffs on inflation was gradually fading. Six months later, the situation has changed fundamentally. Employment is growing at its fastest pace in three years, and the conflict in the Middle East has driven consumer prices higher to 4.2%. The derivatives market is pricing in a tightening, rather than an easing, of monetary policy.
In fact, Kevin Warsh’s appointment could mean that the Fed will become more tolerant of high CPI and PCE readings. The central bank might even cut rates to accommodate the US administration’s agenda, resulting in runaway inflation. In contrast, Europe may slip into a recession due to the ECB’s and the Bank of England’s plans to raise rates amid crippling economies. As a result, transatlantic stagflation.
Recession Probability in US and UK
Source: Bloomberg.
That said, the markets are far more interested in the outcome of the FOMC meeting. Will the wording change to indicate that the next step will be to ease monetary policy? How many Committee members will call for a federal funds rate hike in 2026?
Weekly Trading Plan for EUR/USD
A hawkish surprise from Kevin Warsh could send EUR/USD quotes lower. However, with geopolitical risks taking a back seat and the prospect of near-term monetary expansion, any pullback may present a buying opportunity. In addition, long trades can also be opened on a breakout of the 1.162 resistance level.
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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