On Forex, turbulence gives way to lulls and vice versa. Volatility rises and falls, and Donald Trump has a hand in this. His hands-off approach allows investors to focus on monetary policy again. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The European Central Bank did no harm to the euro.
- The US labor market is raising concerns.
- The dollar exchange rate depends on volatility.
- Selling the EUR/USD pair on the upswing to 1.1835 is relevant.
Weekly US Dollar Fundamental Forecast
Christine Lagarde’s statement that the ECB cannot be held hostage by a single data point smoothed out the fall of the EUR/USD pair. The chances of a deposit rate cut in 2026 fell to 20%. Coupled with alarming data on the US labor market, this allowed the main currency pair to gain some ground.
Lagarde’s careless rhetoric could have further dragged the EUR/USD rate down. However, Christine Lagarde preferred not to do so. According to her, the slowdown in December inflation to 1.7% was due to one-off factors. First and foremost, the fall in commodity prices. The ECB will not change its policy on the basis of a single report; it remains in a comfortable position with a deposit rate of 2%.
Euro Rate Change
Source: Bloomberg.
Investors feared that, dissatisfied with the 13% rally in EUR/USD quotes and the 7% strengthening of the euro against a basket of currencies, the ECB would resort to verbal intervention. However, Christine Lagarde, on the contrary, supported the main currency pair, stating that its growth was already factored into the ECB’s forecasts.
Pressure on the US dollar is coming from worrying signals from the US labor market. In December, the number of job vacancies fell to its lowest level since September 2020. According to Challenger, Gray & Christmas, employers laid off 108,000 workers in January, the highest level since 2009. The chances of a federal funds rate cut in June jumped from 60% to 78%, and in April from 25% to 40%, which helped EUR/USD regain its footing.
Without Donald Trump’s whims, the Forex market is returning to its roots. Volatility is falling, and currency rates are once again beginning to depend on macroeconomics and monetary policy. The US dollar is strengthening thanks to a pause in the Fed’s monetary expansion cycle. Its duration depends on the state of the labor market.
US Dollar Correlation and Volatility
Source: Bloomberg.
However, as soon as the US leader decides to stir things up, volatility soars and confidence in the greenback declines. It falls, forgetting both the economy and the Fed’s views on lowering interest rates. Against this backdrop, the negative correlation between the USD index and the volatility of Forex quotes has reached a record high.
Given Donald Trump’s temper, these swings will recur. This keeps traders busy, forcing them to look beyond fundamental analysis textbooks. The US president is like a child: if all is quiet in his room, something bad must have happened. Investors are waiting for a storm and a collapse of the dollar, but what will be the cause this time? Probably a conflict in the Middle East.
Weekly EURUSD Trading Plan
After falling for five of the last seven days, the EUR/USD pair should take a breather. It’s time to lock in some profits on short positions. However, without geopolitical factors, the euro can be sold if it rises to 1.1835.
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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