The recent resolution of the US government shutdown led to significant turbulence in the financial markets. The likelihood of a federal funds rate cut in December is rising, and the US dollar is experiencing a decline. Market fluctuations are influenced by the status of the US dollar. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US dollar is sold as a risky currency.
- The probability of the Fed lowering interest rates is decreasing.
- Analysts have no doubt about monetary expansion.
- The EUR/USD pair can be bought with targets of 1.17 and 1.182.
Weekly US Dollar Fundamental Forecast
The markets adopted a risk-off stance following the end of the US government shutdown. Stock indices moved into a stage of selling the fact, and the hawkish rhetoric of FOMC officials added to the S&P 500’s decline. The likelihood of a federal funds rate cut in December at some point dropped below 50%. However, the US dollar lost ground rather than gaining it because it is currently seen as a risky currency, and the closure of carry trades has boosted the EUR/USD rate, pushing the pair to two-week highs.
Basket of Momentum Stocks and Probability of December Rate Cut
Source: Bloomberg.
According to Bank of America, after the shutdown ends, volatility and the sensitivity of the US dollar to interest rates will increase on Forex. There are two factors at play, each of which will put pressure on the USD index. Increased volatility in currency market quotes is a reason for traders to close their carry trades. They have recently pocketed handsome profits, taking advantage of the attractiveness of the greenback due to high interest rates.
On the contrary, the futures market’s reassessment of the chances of a federal funds rate cut from 72% to 52% over the past week did not provide support for EUR/USD bears. Why?
US Dollar’s Sensitivity to Interest Rates
Source: Bloomberg.
In the absence of official data, investors have to rely on the opinions of experts. FOMC officials are increasingly talking about the need to keep borrowing costs at current levels and expressing concern about inflation. Even San Francisco Fed President Mary Daly, who was advocating for lower rates a week ago, now says that December will be a lively meeting. There is still a long way to go and a lot of data to consider until the last meeting in 2025.
At the same time, 84 out of 105 Reuters experts are confident that the Fed will ease its monetary policy at the end of the year. 70% of respondents believe that the labor market has remained as cooled as it was in the summer. According to the remaining 30%, its state has worsened. Due to the shutdown, the US economy risks slowing down to 1% in the fourth quarter. In the second quarter, it was 3.8%, and in the third, it is expected to be 2.9%.
Thus, the derivatives market gives a 50% chance of a December cut in the federal funds rate due to a rift within the Fed. However, most Reuters experts disagree with them. The market does not know where to go and, in such conditions, is guided by a decline in risk appetite and an increase in volatility. As a result, the US dollar is caught up in a wave of sell-offs.
Weekly EURUSD Trading Plan
Rumors of the Fed’s imminent resumption of asset purchases are exacerbating the situation. The chances of the EUR/USD pair continuing its rally are growing rapidly. As long as the pair remains above 1.161, long trades can be opened with the targets of 1.17 and 1.182.
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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