Every action has an equal and opposite reaction. Donald Trump’s criticism is forcing the Fed to counteract. However, there is a split within the US regulator, and this factor is extremely important for the US administration. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Demand for hedging against potential US dollar declines has increased.
- Non-resident demand for Treasuries is high.
- The split within the Fed may help the US administration.
- Long positions on the EURUSD pair can be opened on a breakout of 1.1765.
Weekly US Dollar Fundamental Forecast
The Bank of England has noted that the typical strengthening of the US dollar during economic downturns is not occurring at this time. The Bundesbank has expressed concerns that uncertainty is becoming the new norm. The Fed has expressed reluctance to reduce interest rates due to the impact of tariffs. However, a shift in momentum is emerging, with financial markets demonstrating signs of stability. This is evidenced by falling Treasury bond yields and the S&P 500 reaching new record highs, which are exerting pressure on the US dollar.
The Bank of England has observed an increase in the use of currency hedging by foreign investors for their US asset holdings. This process will contribute to the weakening of the US dollar. After a prolonged period of shared progress, the S&P 500 and the USD index have begun to diverge. Markets have reverted to the traditional pattern, where rising global risk appetite weakens the US dollar.
Correlation Between S&P 500 and US Dollar
Source: Trading View.
The “sell America” strategy is no longer viable. Investors are adapting their strategies in response to the policies implemented by the Trump administration. While rumors circulated in April that the US administration’s protectionism would make it taboo for non-residents to buy Treasuries, the results of the latest auction tell a different story. The demand for 10-year securities was high, resulting in a decline in yields. As a result, primary government securities dealers’ share stood at 10.9%. This figure is below the average of 12% for the previous six primary placements. Non-residents have maintained their interest in US Treasury bond yields.
The EURUSD pair’s rally is being driven by Donald Trump’s repeated criticism of the Federal Reserve’s independence. Meanwhile, the president’s calls for lower rates may have unintended consequences. However, the US leader’s stance has led to a divergence of opinion within the FOMC. In June, 10 officials voted for two or three acts of monetary expansion before the end of the year, while nine saw one or fewer cuts in borrowing costs.
FOMC Members’ Dot Projections for Fed Funds Rate
Source: Bloomberg.
The FOMC meeting minutes revealed that doves were concerned about the weakening labor market and argued that tariffs were not accelerating the PCE, while hawks stressed that inflation had not yet been curbed. Most officials believe that the current rate is close to neutral, suggesting a limited capacity for monetary expansion.
The rift within the Fed is a matter of significant concern for the US administration. Regardless of how enthusiastic a proponent of monetary easing Donald Trump’s newly appointed Fed chair may be, they will not be able to dictate policy. The central bank is not a one-person entity, and decisions are made collectively. The presence of doves on the FOMC increases the likelihood of a rate cut, putting pressure on the US dollar.
Weekly EURUSD Trading Plan
The re-establishment of historical correlations between stock indices, Treasury yields, and the US dollar is exerting downward pressure on the EURUSD pair. If the pair breaks through the resistance level of 1.1765, it could give a signal to increase long trades that were opened at 1.1715.
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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