You can never be completely sure about interest rate cuts, nor about Jerome Powell’s signals of a pause in the Fed’s monetary expansion cycle, nor about the FOMC’s revised forecasts. How will the EUR/USD pair respond to the FOMC meeting? Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Markets are bracing for a hawkish cut.
- Powell will likely signal a pause.
- FOMC forecasts may prove ineffective.
- Long positions on the EUR/USD pair can be opened on a rebound from 1.16 and 1.158.
Daily US Dollar Fundamental Forecast
Third time’s a charm. The Fed is set to cut the federal funds rate for the third time in 2025, and traders are once again expecting the US dollar to strengthen. In September and October, the EUR/USD pair fell amid monetary policy easing, driven by the “buy the rumor, sell the news” principle and Jerome Powell’s hawkish comments. Is history repeating itself?
The futures market is 88% confident that rates will be cut following the FOMC meeting on December 9–10, but it will be incredibly difficult for the Fed chair to reach a compromise. At least five of the twelve voting FOMC members voiced concerns about inflation. Goldman Sachs expects three dissenters this time: two will oppose a sharp cut in borrowing costs, and one will support a 50 bp cut.
Forecast for Fed Rate Cuts
Source: Wall Street Journal.
Investors are counting on a hawkish stance. However, it will not be easy for Jerome Powell to mention a pause, as the Fed will have much more information than it does now by January, including December inflation and employment data. However, the US dollar may strengthen through other channels. The FOMC’s revised forecasts may feature only a single cut, as in September. The futures market has raised the odds of such an outcome from 18% before Thanksgiving to 38% today.
In fact, there is no certainty here either. What is the point of trusting the Committee’s assessments if it will be reshuffled in 2026? Shadow Fed Chair Kevin Hassett called long-term forecasting irresponsible, noting that the central bank’s verdicts depend on data, which will likely change.
As a result, some investors have no confidence in the hawkish cut, nor do they trust the FOMC’s forecasts. Moreover, the US administration adds to the uncertainty. Treasury Secretary Scott Bessent said that the Fed chair could lead the discussion, but ultimately, he had only one vote. Kevin Hassett says he will be guided by his own opinion and will not give in to political pressure. Should we expect aggressive monetary expansion and a fall in the USD index?
Market Expectations for Fed Interest Rate
Source: Bloomberg.
This scenario may unfold. No matter how many times the Fed cuts rates, the ECB may increase them in 2026. The divergence in monetary policy suggests that the upward trend in EUR/USD quotes is sustainable. However, everything can change in the near future.
Daily EURUSD Trading Plan
Jerome Powell will find it nearly impossible to sell a pause in January to investors. He can only deliver the hawkish narrative at the press conference. As a result, the US dollar may strengthen in the short term, allowing traders to open long positions on the EUR/USD pair on a rebound from the 1.16 and 1.158 support levels.
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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