Perhaps the markets got ahead of themselves, aggressively selling the EUR/USD pair after the September FOMC meeting. The Fed may not intend to be as aggressive as CME derivatives are suggesting. Let’s take a closer look and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Markets are recovering following the Fed meeting.
- The Fed has lowered Treasury yields.
- Growing demand for US assets is supporting the US dollar.
- Short trades can be considered with targets of 1.1400 and 1.1300.
Weekly Fundamental Forecast for Dollar
Markets react first and figure things out later. An extremely volatile initial reaction is often followed by a pullback as emotions cool, and investors reassess the facts. The EUR/USD pair posted its lowest intraday level in three months as investors interpreted Kevin Warsh’s rhetoric as hawkish. US dollar bulls also welcomed the fact that 16 of the 18 FOMC officials indicated in their updated projections that they expect at least two rounds of monetary tightening in 2026.
Market and FOMC Forecasts for Fed Funds Rate
Source: Nordea Markets.
The derivatives market is confident that the federal funds rate will rise to 4.5% and assigns a probability of more than 50% that it will reach 4.75% over the next 12 months. However, the FOMC’s median projection for 2027 remains at 4.1%, the same level as its projection for 2026. This implies just one more round of monetary tightening, most likely in December, followed by a prolonged pause. Of course, much can change, as the Fed’s policy remains data-dependent. For now, the markets appear to be rushing into premature conclusions.
Meanwhile, this does not mean that the decline in the EUR/USD is over. The euro is being supported by falling oil prices and a rally in stock indices, which is improving global risk appetite and reducing demand for the US dollar as a safe-haven asset. In addition, markets are pricing in three or four more rate hikes by the ECB. However, political risks in Germany and France, along with a looming energy crisis, are likely to limit the euro’s upside.
Market Expectations for Fed Funds Rate
Source: Bloomberg.
Moreover, the fact that market expectations have been repriced matters. At the beginning of the year, investors were expecting cuts in the federal funds rate. By mid-year, they had shifted toward anticipating a modest increase. Now, markets are pricing in an acceleration of the Fed’s monetary tightening cycle. As a result, the trend of declining net speculative long positions in the US dollar could reverse.
Speculative Positions for US Dollar
Source: Bloomberg.
The US dollar is also benefiting from renewed confidence in the Fed. Rate hikes and Kevin Warsh’s hawkish rhetoric have achieved what Scott Bessent couldn’t with the bond buyback: lower Treasury yields. Investors are increasingly confident that the central bank will fight inflation to the bitter end, reviving demand for US assets, including Treasuries. The US dollar stands to benefit from this renewed appetite.
Against this backdrop, the EUR/USD rally is likely to be temporary. Investors are letting emotions cool and reassessing the Fed’s message, but factors such as the continuation of the monetary tightening cycle and restored confidence in the central bank could eventually bring dollar bears back into the market.
Weekly Trading Plan for EUR/USD
As a result, selling the EUR/USD with targets of 1.1400 and 1.1300 remains a viable strategy. Any upswings could provide opportunities to establish short positions in 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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
