The longest shutdown in US history is coming to an end. What will the economic statistics for the United States be? Will this data force the Fed to lower or maintain interest rates? Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The Senate approved the end of the shutdown.
- There is a major rift within the Fed.
- The US dollar’s performance will depend on the data.
- Short trades on the EUR/USD pair can be opened on a breakout of 1.154.
Weekly US Dollar Fundamental Forecast
When you see the light at the end of the tunnel, caution fades away, but uncertainty remains. Will the data show that the cooling of the US labor market in the summer was temporary, or will the US jobs market continue to slow? The plan approved by the Senate allows for the government to work fully only until January 30, so the US may exit one tunnel only to enter another. Against this backdrop, the EUR/USD pair is treading water.
Morgan Stanley and MUFG believe that the end of the shutdown will weaken the US dollar, as new statistics will show a deterioration in the employment situation. Alternative reports suggest this, but the Fed and investors need official data to make decisions. The lack of such data exacerbates the division within the US central bank.
According to San Francisco Fed President Mary Daly, it would be a mistake to keep rates high for too long. Inflation will not rise too high, and inflation expectations will remain anchored. At the same time, the cooling of the labor market gives the Fed reason to continue its cycle of monetary expansion. FOMC member Stephen Miran is ready to vote for a 50 bp cut in borrowing costs in December.
In contrast, St. Louis Fed President Alberto Musalem expects the US economy to accelerate in the first quarter after the shutdown ends. Therefore, the central bank should remain cautious about lowering rates. The futures market seems to share this view, suggesting a 62% chance of monetary policy easing at the end of 2025.
US Dollar Volatility Index
Source: Bloomberg.
The lack of official statistics due to the shutdown led to a significant decrease in the volatility of the US dollar. In conjunction with high US debt market rates, this allowed carry traders to gain profits. According to Bloomberg, the effectiveness of arbitrage involving the greenback was higher than for most other assets. This was one of the reasons for the 3% rebound in the USD index after a 10% decline in the first half of the year.
Carry Trade Efficiency
Source: Bloomberg.
The markets are concerned about several issues at once. Will the House of Representatives approve the government reopening approved by the Senate? Will the shutdown resume in February? What will the data reveal? At the same time, the increase in the volatility of the US dollar as the data comes in will deprive it of an important advantage – support from carry traders.
However, employment and inflation statistics are much more important. The Fed will base its decisions on them, and the chances of a sharp cut in the federal funds rate will change.
Weekly EURUSD Trading Plan
Just like the Fed, traders should keep all options on the table. A break below 1.154 could offer an opportunity to sell the EUR/USD pair. However, if the euro fails to remain below 1.1525 and 1.15, buyers will return to the market.
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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