The US dollar dropped sharply in March due to concerns that tariffs could trigger a recession in the US. However, the Fed believes that inflation will accelerate, which aligns with the situation seen in November 2024. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The Fed has calmed investors.
- FOMC officials intend to curb inflation.
- The Fed is in no hurry to lower the federal funds rate.
- Short trades can be considered if the EURUSD pair fails to settle above 1.09.
Weekly US Dollar Fundamental Forecast
The Fed is not exhibiting signs of panic in the face of a recession. Against this backdrop, US stock indices will likely see an uptick while the US dollar will slide. Jerome Powell has admitted that inflation could accelerate because of tariffs, but he considers their impact to be temporary or transitory. As a result, the anticipated trajectory of the federal funds rate beyond 2025 remains unchanged. This openness in monetary policy has deprived EURUSD bears of the opportunity to push the pair lower on the news.
Fed Funds Rate Projections
Source: Wall Street Journal.
Prior to the March FOMC meeting, investors had two primary concerns. The central bank would mention the approaching recession, and the Fed would signal a significant tariff-driven acceleration in inflation. However, the markets bought the US dollar, dragging the EURUSD pair to 1.086.
However, these concerns were dispelled when Jerome Powell noted that data on the state of the US economy was quite strong. Recession risks have increased, but they remain at low levels. As a result, the Fed modestly adjusted its 2025 GDP forecast from 2.1% to 1.7%.
Inflation estimates were revised upward from 2.5% to 2.7%, with Jerome Powell attributing this to tariffs and noting that progress in moving PCE toward the 2% target has been delayed. The Fed considers the potential for import tariff-driven price acceleration to be transitory, which has helped to ease investor worries.
The majority of FOMC officials, 11 out of 19, anticipate two acts of monetary expansion according to the Fed’s dot plot, while in December, 15 officials expected two cuts, with 8 FOMC members predicting only one or no rate cuts. This hawkish shift suggests that the Fed is more determined to fight inflation than to cool the economy, further reducing investor fears of a recession.
FOMC Forecasts for Fed Funds Rate
Source: Bloomberg.
Markets brushed off the fears, which boosted equity indices and weakened the US dollar. However, the Fed painted a scenario that has dominated investor sentiment since Donald Trump’s victory in the US presidential election. Tariffs have been shown to accelerate inflation in the short term, prompting the central bank to pause for a prolonged period, which triggered a sell-off in the EURUSD rate. This is particularly relevant as the factor of fiscal stimulus by the Bundestag has already been priced in the quotes and the ongoing conflict in Eastern Europe is far from ending.
The White House has urged the Fed to adopt a more proactive stance on rate cuts, as tariffs are expected to stimulate the economy in the near future. Donald Trump declared April 2 as America’s “liberating day.” However, as long as the central bank maintains its independence, the US president’s words have little significance for the US financial regulator.
Weekly EURUSD Trading Plan
If the EURUSD pair fails to settle above 1.09, it will signal that bullish momentum is fading. Against this background, traders may consider short positions with targets of 1.0825 and 1.0715.
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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