The EUR/USD pair appears poised to resume its downtrend, supported by a resilient US labor market and the unwinding of the Trump premium. The US president has consistently favored a weaker dollar, making his political defeat a potential catalyst for dollar appreciation. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- US employment rose by 165,000 in October.
- The Fed may be able to raise rates in December.
- The US dollar is rising as the Trump premium unwinds.
- Short positions can be opened as long as the EUR/USD pair trades below 1.1195.
Weekly Fundamental Forecast for US Dollar
What factor caused the EUR/USD pair to plummet: impressive employment figures or the unwinding of the Trump rally? At first glance, the 165,000 increase in employment—more than double the Bloomberg consensus forecast and above even the highest estimate of 131,000—seemed like a compelling reason to buy the US dollar. On the other hand, the greenback had appeared undervalued in the medium term due to tensions between the US administration and the Fed over interest rates. The Democrats’ victory changed the rules of the game.
US Nonfarm Payrolls and Unemployment Rate
Source: Bloomberg.
It’s not just about the October figures. Employment data for August and September were revised upward by a combined 80,000 jobs. With these revisions, nonfarm payrolls have increased by an average of 137,000 over the past three months. Another indicator points to the labor market’s continued strength: the unemployment rate has fallen to 4.1% and has remained below the 5% threshold for nearly five years. With just a few more months, the current streak could surpass the record of 64 consecutive months set between 1965 and 1970.
Robust employment data gives the Fed greater room to tighten monetary policy. The probability of a federal funds rate hike in December has risen from 66% to 76%. Meanwhile, derivatives markets have increased the odds of two rate hikes over the next 12 months from 52% to 63%.
Market Expectations for Fed Funds Rate
Source: Bloomberg.
Such impressive employment figures would give the Fed ample justification to accelerate its monetary tightening cycle. However, the central bank faces another concern: a record decline in US stock market capitalization. If markets stabilize, the Fed may be able to proceed as planned, but should the sell-off continue, tighter financial conditions could constrain its ability to raise interest rates.
The S&P 500’s sharp decline is widely attributed to growing concerns about the future of artificial intelligence. However, another contributing factor is the so-called unwinding of the Trump premium. The president has consistently championed the stock market, and his rhetoric has repeatedly supported equity indices. A Democratic victory in the midterm elections has weighed on assets perceived as benefiting from the administration’s policies, including oil. The decline in oil prices also reflects fading concerns about a potential escalation of the conflict in the Middle East.
The US dollar presents a different picture. Donald Trump has repeatedly opposed a strong dollar and high interest rates. Against the backdrop of diverging economic growth and monetary policy, the EUR/USD pair could have declined much more sharply in the run-up to the midterm elections. However, the Trump premium helped. The Democrats’ victory has now removed that support.
Weekly Trading Plan for EUR/USD
Investors’ renewed focus on economic fundamentals, stronger-than-expected labor market data, and the unwinding of the Trump premium have sent the EUR/USD tumbling. As long as the pair remains below 1.1190, the bias should remain bearish, with selling opportunities in focus.
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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