Will the Fed adopt a cautious approach in October amid mixed inflation and employment trends, or will it pursue a more aggressive strategy? Jerome Powell’s hawkish rhetoric may temper bullish sentiment in the EUR/USD pair. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed is determined to continue its monetary expansion cycle.
- A divided FOMC is unable to deliver a clear signal.
- A surprise from the central bank could trigger turmoil on Forex.
- Long trades on the EUR/USD pair can be opened on a rebound from 1.162 or a return above 1.166.
Daily US Dollar Fundamental Forecast
The outcome of the October FOMC meeting was clear before it even began. The central bank will cut the federal funds rate by 25 basis points to 4%, and Jerome Powell will avoid giving any hint of the Fed’s future steps amid a divided board. However, fears of unpleasant surprises are forcing traders to close their positions on the US dollar ahead of the key event and are preventing the EUR/USD from rising higher. The desire to avoid taking risks is common.
The recent shutdown has created an uncertain environment for the Fed, leaving it to operate without clear guidance. Each new report on the state of the economy is extremely valuable. While the inflation rate grew more slowly in September, reaching 3%, this shift supported the FOMC doves. Conversely, the ADP data aligned with the hawks’ interests. In the four weeks leading up to October 11, private sector employment grew by an average of 14,250. In August, the number of jobless claims fell by 32,000, indicating positive shifts in the labor market according to the latest figures. This represents a significant change from the beginning of the year. However, there has been a marked improvement since the summer.
ADP Private Payrolls
Source: Bloomberg.
The latest ADP statistics serve to reinforce the idea that a halt in the cycle of monetary expansion is likely to occur in the near future. The futures market is anticipating rate cuts in October, December, and March. If the Fed voices concerns about the sustainability of this trajectory, investors will likely seek refuge in the US dollar once again.
The outcome is uncertain, particularly given the split opinion within the Committee. The latest FOMC forecast included two additional rate cuts before the end of the year, but nine members preferred no more than one.
FOMC Forecast for Fed Funds Rate
Source: Bloomberg.
The Federal Reserve’s dovish members are confident that labor market weakness will eventually slow inflation. In a nutshell, the surge in prices due to tariffs is only temporary. In this regard, the current CPI figure, which is below the 3.1% predicted by Bloomberg experts, is a positive factor. However, if employment remains stable, it might not reflect labor market weakness.
The ECB is in a significantly more favorable position. Christine Lagarde finds the inflation trends acceptable. Most Bloomberg experts predict that the deposit rate will remain at 2% until 2027, with 17% of respondents believing that it will start to rise in 2026.
The EUR/USD pair’s trajectory will depend on whether the Federal Reserve announces any unexpected policy shifts. If the FOMC meeting in October proceeds as anticipated, the euro will have an opportunity to resume its upward trend. Conversely, Jerome Powell’s hawkish rhetoric will likely boost the US dollar.
Daily EUR/USD Trading Plan
Against this background, long positions on the EUR/USD pair can be opened on a rebound from the support level of 1.162 or if the quotes return above 1.166. Conversely, if the price breaks through 1.162, the euro can be sold 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
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