There is an apparent contradiction between the Fed’s dual mandate goals. In order to achieve a soft landing for the US economy, the Fed should predict how inflation and employment will evolve. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The Fed’s high interest rates will harm the economy.
- Aggressive monetary expansion will unleash inflation.
- The shutdown is helping the US dollar.
- Long trades on the EURUSD pair can be opened above 1.155.
Weekly US Dollar Fundamental Forecast
In the fall, the markets resemble a soccer match, where the Fed is trying to figure out which way to jump to save a penalty kick. If it leaves interest rates too high, the US economy will suffer. If it starts to aggressively loosen monetary policy, inflation will accelerate. The chances of conceding a goal are increasing due to the thick fog in the stadium in the form of a shutdown, and all spectators want to predict the Fed’s actions.
The rift in the FOMC is indeed reminiscent of a floundering goalkeeper. Chicago Fed President Austan Goolsbee is more concerned about inflation exceeding the target for four years than the state of the labor market. In contrast, Stephen Miran does not consider high prices to be a problem and criticizes overly restrictive monetary policy. Lisa Cook favors a rate cut in October but gives no clues about December. For her, every new Fed meeting is a live one.
San Francisco Fed President Mary Daly believes that the central bank should conceal the possibility of a cut in the federal funds rate at the end of the year, as there is a clear contradiction between the two mandates: employment and inflation.
US PMI and Production Index
Source: Bloomberg.
However, investors have not been particularly successful in their attempts to analyse the data. The ISM Manufacturing Purchasing Managers’ Index was disappointing, remaining below the critical 50 mark for the eighth consecutive month, pointing to a contraction in the sector. Employment has deteriorated over the same period. The price index showed growth in October, though at a slower pace than in September.
It appears that the fall in EUR/USD quotes was not due to the split in the FOMC and the market’s reassessment of the federal funds rate trajectory, but rather to the shutdown. Jerome Powell has said that the shutdown’s duration is forcing the Fed to be cautious. Meanwhile, Polymarket’s increased probability that the government shutdown will last until mid-November (up to 52%) is helping the US dollar.
Odds on US Shutdown Completion
Source: Wall Street Journal.
In addition to the Federal Reserve, there is also the Supreme Court with its ruling on tariffs. Will it decide to give Donald Trump unlimited powers to reshape the global economy, or will it recognize that the US administration has violated the Constitution, which places responsibility for collecting taxes and tariffs on Congress, not the president?
Donald Trump calls the Supreme Court’s verdict one of the most important decisions in the country’s history. If the tariffs are canceled, the whole world will mock the United States. Moreover, the $400 billion in import duties collected by the US should be returned.
Weekly EURUSD Trading Plan
Considering the current situation, short positions on the EUR/USD pair can be kept open, with a break-even point adjusted from 1.1575 to 1.155. Notably, long positions can be opened only if the pair returns above the 1.155 level.
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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