When everything is going smoothly, you start looking for a catch. Political woes in Germany and fears about the Fed’s hawkish rhetoric in December have tempered EUR/USD bulls. Let’s discuss these topics and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The split in the CDU ranks in Germany threatens the euro.
- EUR/USD bulls hope for a seasonally strong December.
- The dollar may rise after the FOMC meeting.
- Long positions can be opened on a rebound from 1.162, 1.161, and 1.1585.
Weekly Euro Fundamental Forecast
Everybody has a plan until they get punched in the face. The EUR/USD pair was steadily heading towards 1.17, but the split in the Christian Democratic Union came as a shock to the euro. If Friedrich Merz cannot manage his own party, is he capable of managing the country? The Social Democrats hinted that the coalition would collapse if the pension bill failed in the Bundestag. This could lead to early elections and a victory for the highly popular Alternative for Germany.
Although Russia and Ukraine have been unable to reach a consensus, EUR/USD bulls still believe an agreement will be reached by Christmas. Coupled with the Santa Claus rally in the US stock market, profit repatriation by European investors, and hedging, this gives hope for growth in the regional currency in December, which is a seasonally strong month for it.
Unemployment Claims
Source: Wall Street Journal.
However, the drop in unemployment claims to their three-year lows reminds us of the FOMC hawks. The committee is divided, with Jerome Powell seeking a compromise. If the Fed is going to cut the federal funds rate in December, it should leave the door open for a pause in the cycle of monetary expansion. Against this backdrop, the futures market gives only a 25% chance of a sharp cut in borrowing costs from 3.75% to 3.5% at the central bank’s first meeting in 2026.
As a result, history may repeat itself, as it did at the two previous meetings, when the US dollar strengthened in response to the Fed’s rate cuts in September and October. Investors bought the EUR/USD pair on rumors and sold it on the news. However, this time, the euro is benefiting from the seasonally strong December.
Leading Economic Index (LEI) vs. Coincident Index (CEI)
Source: Wall Street Journal.
Meanwhile, much will depend on the shadow Fed chairman and the state of the US economy. The topic of recession has been forgotten and abandoned. It may return soon, as the LEI-to-CEI ratio points to an economic downturn.
The main contender for the Fed chairmanship, Kevin Hassett, has stated that the central bank should cut rates in December. In his opinion, the rates will fall significantly lower, but everything will depend on inflation and employment. For now, if there is consensus around 25 basis points, then he will take it. The shadow chairman has already embarked on his mission—all the worse for the US dollar.
Weekly EURUSD Trading Plan
The German political climate and concerns over the Fed’s hawkish rhetoric are limiting EUR/USD bulls’ enthusiasm. Prior to the FOMC meeting, the major currency pair may consolidate. At the same time, a decline in the euro with a rebound from support levels of 1.162, 1.161, and 1.1585 will offer an opportunity to open long positions.
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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