The US Fed can take a wait-and-see approach given the uncertainty surrounding US policy. It is evident that Donald Trump is now setting the terms for the financial markets, rather than the central bank. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The Fed has decided to keep rates at 4.25–4.5%.
- The central bank advocates a balanced approach.
- The US policy is putting pressure on the US dollar.
- Consider buying the EURUSD pair during a rebound from 1.124 and 1.118.
Weekly US Dollar Fundamental Forecast
The Fed no longer views itself as the ultimate authority. At the May FOMC meeting, Jerome Powell emphasized a “wait and see” approach, using the phrase 11 times. This passive stance is largely due to uncertainty regarding the US administration’s policies. Donald Trump’s influence on the financial markets is evident, particularly in the EURUSD pair’s reaction to the decision to maintain the federal funds rate at 4.5%.
Federal Funds Rate Performance
Source: Wall Street Journal.
In the run-up to the Fed meeting, there was significant speculation on Forex that the central bank would adopt a preventive approach. If unemployment spikes, interest rates may decrease. Analysts drew comparisons to 2019, when the Fed implemented three rounds of monetary expansion during the US-China trade war as a precautionary measure. However, Jerome Powell rejected these parallels, noting that inflation levels are currently much higher.
The Fed chair emphasized the importance of a balanced approach within its dual mandate, asserting that substantial climbs in either inflation or unemployment must be addressed promptly. With the economy remaining strong, the Fed can afford to pause its actions for now. Consequently, the derivatives market has reduced the likelihood of a fourth round of monetary expansion in 2025 from 40% to 36%.
Federal Funds Rate Forecasts
Source: Wall Street Journal.
The Fed chair emphasized the importance of a balanced approach, especially as US protectionism is setting the stage for a divergence in monetary policy. The Fed is increasingly wary of potential inflationary pressures arising from tariffs, while central banks in other countries are more focused on stimulating economic growth. These banks may need to cut rates more aggressively than the Fed does, which, in theory, should bolster the US dollar. That may be true in theory, but reality tells a different story.
Donald Trump’s focus on reducing the US trade deficit is negatively impacting the capital account, leading to a money outflow from the US and a plunge in the USD index. Asian countries, which have accumulated US assets from large trade surpluses, are now selling them off. As a result, Eurizon SLJ Capital estimates that $2.5 trillion could return to the US, paving the way for a potential rally in the EURUSD pair.
At the same time, the strengthening of other currencies against the greenback is helping Donald Trump address competitiveness issues and reduce the trade deficit by stimulating exports.
Weekly EURUSD Trading Plan
The White House needs a weaker currency and will not abandon its plans to overhaul the international trading system, which is putting pressure on the US dollar. The downside potential for the EURUSD pair appears limited. Therefore, if the price rebounds from the support levels of 1,124 and 1,118, consider closing the short trades initiated at 1.1325 and switching to long positions.
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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