The euro is sinking as the economy is weak, deflation looms on the horizon, and Donald Trump’s chances of winning are growing fast. However, it can be the best time to buy when everyone else is selling. Let’s discuss it and make a trading plan for EURUSD.
The article covers the following subjects:
Highlights and key points
- The pound’s fall in response to slowing inflation has also sunk the euro.
- Trump’s election victory will lead to higher rates in the U.S.
- Frankfurt has no choice but to loosen monetary policy.
- EURUSD will soar to 1.0955 or fall below 1.08, depending on the ECB’s verdict.
Fundamental forecast for euro for today
Misfortune never comes alone. The Eurozone’s weak economy and expected ECB rate cuts were intensified by the Trump trade and the UK’s inflation drop below the Bank of England’s 2% target, the first in three years. As a result, the yield on British bonds pulled down their German counterparts, allowing EURUSD to approach the previously set short target of 1.085 at arm’s length.
In theory, the US dollar should weaken if the Fed cuts rates, but in practice, much depends on how synchronized rate cuts are and how quickly the policies are loosened. Considering the Eurozone’s cooling economy and the growing risks of deflation, the ECB is simply obliged to speed up the process of policy easing. Moreover, a sharp slowdown in CPI is a problem for the whole of Europe.
It’s no surprise that Bloomberg experts are confident a 25 bp cut to the deposit rate will happen at the October 17 meeting, and they anticipate it dropping to 2% by the end of 2025.
ECB rate trends and forecasts
Source: Bloomberg.
In contrast, the US economy looks like the only clean shirt in a dirty laundry basket. Wall Street Journal experts expect a modest increase in unemployment from the current 4.1% to 4.2% by the end of 2024 and a rise in employment by an average of 130.4 thousand per month over the next year. The labor market will cool but not freeze, allowing the Fed not to rush with monetary expansion.
Experts predict a decrease in the federal funds rate to 4.4% by the end of 2024 and 3.5% by the end of 2025. At the same time, TS Lombard sees it growing to 4.5% after a decrease to 4%. According to TS Lombard, the cost of borrowing will return above 5% at the end of 2027.
Fed rate forecasts
Source: Wall Street Journal.
This scenario does not seem fantastic. If Donald Trump comes to power in the US, the policy of protectionism and fiscal stimulus will accelerate inflation and force the Fed to keep the federal funds rate at a plateau and then start raising it. Such a scenario is favorable for the US dollar, and Deutsche Bank recommends buying the greenback against the euro, Mexican peso, and South Korean won. On the other hand, a Kamala Harris victory will allow the selling of the dollar against the Japanese yen.
In the last few days, the market has been very confident that the Republican will win, which, combined with expectations of the ECB’s monetary expansion start, pushes the EURUSD down.
Trading plan for EURUSD for today
A 25 bp rate cut to 3.25% is already priced into the pair, so if this occurs without any hints from Christine Lagarde about further cuts in December, EURUSD could rebound toward 1.0905 and 1.0955. A rate cut by 50 basis points will drive the euro below $1.08. In the first case, consider a shift from short-term buying with targets at 1.0905 and 1.0955 to selling; in the second, build up short positions.
Price chart of EURUSD in real time mode
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