If the Fed fails to stand firm in the face of Trump’s demands, it risks losing credibility. If it underestimates the impact of inflation, it may exacerbate the risk of recession for the US economy. The EURUSD pair is showing notable sensitivity to this decision, underscoring the complexity of the situation. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US president may choose a “shadow” Fed chair.
- The derivatives market expects the Fed to cut rates by 66 basis points.
- The futures market considers $1.17 to be a key level for the euro.
- Long trades on the EURUSD pair can be opened with targets at 1.2 and 1.3.
Monthly US Dollar Fundamental Forecast
Donald Trump lacks the authority to dismiss the Chairman of the Federal Reserve. However, he can create an unbearable working environment for Jerome Powell. The ongoing criticism, public accusations, and suggestions regarding the selection of a “shadow Fed chair” are making Jerome Powell’s job more stressful. Investors are opting to divest from the US dollar due to this unprecedented pressure. Against this backdrop, the EURUSD pair has soared to a three-year high.
The Fed finds itself in a tight spot. The US administration has made it clear that monetary policy must contribute to accelerating GDP growth. Donald Trump’s ambitious project will provide the necessary impetus for the economy. A 200-250 basis point decrease in the federal funds rate could potentially accelerate this process. If the Fed were to yield to pressure from Donald Trump, it would risk losing credibility. Meanwhile, the US regulator’s continued reluctance to resume the cycle of monetary expansion could trigger a recession in the US.
In light of his discontent with the current leadership, the US president may appoint a new head of the central bank at an earlier than anticipated timeframe. By autumn, the Fed may have a “shadow chair.” Their comments will influence various assets, and they will likely adopt a dovish stance.
EURUSD Risk Reversals
Source: Bloomberg.
As expected, the derivatives market has increased the expected scale of monetary expansion. According to the current projections, the Fed will reduce interest rates by 66 basis points by the end of 2025. The ECB is expected to cut rates by 25 basis points. This divergence in monetary policy increases the risk of a reversal for the euro and serves as a primary driver for EURUSD bulls.
HSBC has revised its forecast for the primary currency pair, anticipating an end-of-year figure of 1.2, up from the previous estimate of 1.15. Deutsche Bank anticipates a 1.2% increase within 12 months. UBS forecasts a more rapid decline in US interest rates compared to other G10 countries, which is expected to propel the EURUSD pair to 1.23 by the end of December.
Key Levels for EURUSD According to Derivatives Market
Source: Bloomberg.
In fact, the rally may proceed much faster as the euro is approaching a key level of 1.17. Notably, a substantial number of futures contracts are currently held at this level. A breakout followed by consolidation above this key level could trigger a rapid rise in the EURUSD pair to 1.2. Otherwise, a rebound from this level with a return below 1.1625 will increase the risks of a pullback.
Due to his accomplishments in the Middle East, Donald Trump will persist in implementing his agenda, which involves exerting pressure on the Fed, implementing tariffs, and weakening the US dollar. Therefore, the upward trend in the main currency pair will likely remain strong and sustainable.
Monthly EURUSD Trading Plan
In light of these developments, the previously stated target of 1.2 for long positions on the EURUSD pair no longer appears to be a ceiling. The price will likely reach this target within the next 1-3 months. In 2026, the euro may climb above 1.3. Thus, long-term purchases during market pullbacks are still relevant.
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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