Investors have been wrong twice this year. Firstly, they expected the US dollar to strengthen, but it weakened due to tariffs. Secondly, they predicted weakness in the greenback, but it strengthened thanks to AI and the S&P 500 index. Let’s discuss these topics and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- US GDP rose thanks to AI and the S&P 500.
- The Fed may stop cutting rates.
- Kevin Hassett is not as straightforward as he seems.
- Positions on the EUR/USD pair can be opened depending on the employment report.
Daily US Dollar Fundamental Forecast
On Forex, traders often learn from their mistakes. In 2025, the greenback was the frontrunner in the currency market. Investors were confident that Donald Trump’s tariffs would slow economic growth abroad, accelerate US inflation, and force the Fed to keep interest rates high. However, the result was a 10% drop in the USD index in the first half of the year. The markets changed their views. They began to assume that the tariffs would slow down US GDP and force the Fed to lower rates. In fact, the US dollar performed well until December.
The biggest mistake of the second half of the year was ignoring AI, and the US stock market hitting record highs. The former led to higher productivity, while the latter boosted consumer spending by wealthy Americans who had profited from the stock market. These factors boosted GDP and allowed the EUR/USD bears to fight back until the very end.
In 2026, the US dollar will likely be an outsider on Forex. The Fed, spearheaded by the US administration, is expected to aggressively cut rates, while the ECB has completed its monetary expansion cycle. If the US economy performs well and capital inflows into US stock markets continue, these factors will only lead to a temporary strengthening of the greenback.
FOMC Forecasts for Unemployment and Inflation
Source: Nordea Markets.
In fact, there are certain risks that investors will make the same mistake for the third time. According to New York Fed President John Williams, monetary policy is in a good position. It has shifted from moderately tight to neutral. FOMC forecasts suggest a slowdown in both inflation and unemployment. Officials see only one rate cut, while the futures market expects three. Meanwhile, Nordea predicts no cuts at all.
If the Fed halts its rate cuts, the US dollar will strengthen. However, this requires strong labor market statistics. Its weakness is already reflected in EUR/USD quotes following Jerome Powell’s statement that actual employment will be on average 60,000 lower than official statistics show.
Candidates’ Chances for Fed Chair Position
Source: Bloomberg.
What else could go wrong? Judging by Kevin Hassett’s comments on the Fed’s independence, he may not follow the US president’s orders. Notably, the chances of Kevin Warsh’s main opponent have increased significantly recently.
The eurozone economy is showing increased resilience to tariffs, but in 2026, it may lose that strength. The ECB will be forced to cut rates. Many factors could change the current market narrative that the EUR/USD rally will continue.
Daily EURUSD Trading Plan
However, investors are focused on the US labor market. Strong employment data will allow traders to sell the euro, targeting 1.17 and 1.1675. Conversely, weak data will give traders a reason to increase their long positions on the EUR/USD pair with targets of 1.186 and 1.196.
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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