The real-world economy differs from economic theory textbooks. From time to time, economic theory fails. However, should we discard something that has worked for decades? Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- US inflation continues to slow down.
- The Fed will cut the federal funds rate by July.
- The divergence in GDP growth between the US and the eurozone benefits the euro.
- Short trades on the EUR/USD pair can be opened on a breakout of 1.1845 and 1.1835.
Weekly US Dollar Fundamental Forecast
Theory without practice is dead. When the Fed began its most aggressive cycle of rate hikes in four decades in 2022, the market said that a recession was inevitable. However, the US economy achieved a soft landing. In 2025, sweeping US tariffs were supposed to spur inflation. In fact, consumer prices slowed to 2.4% in January. Perhaps Donald Trump’s ideas are not as crazy as they seem in theory?
Inflation in the US is likely to return to the 2% target without a recession, which not so long ago seemed impossible. According to economists, it would take a significant increase in unemployment for the disinflationary trend to continue. However, the labor market has stabilized, and consumer prices are falling.
US Inflation Change
Source: Wall Street Journal.
The Fed is unlikely to ease monetary policy based solely on CPI data. Another indicator is more important for the central bank: the personal consumption expenditure (PCE) index. At present, it is still much closer to 3% than to 2%.
However, if the soft landing continues, the economy grows ahead of the trend, employment increases by more than 50,000 per month, and inflation moves towards the target, such high rates will not be necessary. The futures market is confident that they will fall by July and estimates the scale of monetary expansion at 60 basis points in 2026. We are talking about two acts with a 40% probability of a third.
In such conditions, even if the US dollar gains ground in the short term, its prospects look clearly bearish in the medium and long term. This is especially true if the US economy continues to slow down, while the European economy, on the contrary, picks up speed. The narrower divergence allows Capital Group to predict an increase in the ECB’s deposit rate by the end of the year and a return of the EUR/USD pair above 1.2.
In this regard, the third week of February may provide important insights. According to Bloomberg experts, disappointing retail sales statistics triggered a slowdown in US GDP in the fourth quarter from 4.4% to 3%. On the contrary, leading indicators for the eurozone economy – business activity indicators – may continue to grow.
In this turbulent world, which has become unpredictable since Donald Trump’s re-election, nothing can be taken for granted. However, it does not make sense to completely abandon the principles of fundamental analysis that have been effective for decades.
Weekly EURUSD Trading Plan
The optimal strategy is to combine short-term sales of the EUR/USD pair while looking for an entry point for buying the euro in the medium term. A breakout of the support level of 1.1845 and 1.1835 will be a reason to open short positions on the euro against the US dollar.
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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