The Federal Reserve decided to keep rates unchanged while leaving the door open for a possible rate cut in September. However, the futures market isn’t buying it, driving the US dollar higher. Let’s discuss it and make a trading plan for EUR/USD.
The article covers the following subjects:
Major Takeaways
- The Fed extends the pause in the rate-cutting cycle.
- The US economy remains solid.
- The dollar is regaining safe-haven status.
- Selling EUR/USD on pullbacks targeting 1.1325 remains relevant.
Weekly Fundamental Forecast for Dollar
There are two worlds the United States may be living in. In the first, economic weakness masked by strong data finally begins to show. In the second, household resilience and artificial intelligence help the US overcome the aftermath of the trade war. The Fed, like everyone else, doesn’t know which one will materialize. It’s trying to act reasonably in a complex environment. The markets seem to agree, and they’re buying the dollar again.
The Fed is like a goalkeeper trying to guess the direction of a penalty shot. Tariffs may drive inflation higher, so cutting rates now could be a mistake. On the other hand, if import duties slow down the economy, the Fed may jump too late, easing policy only after it’s already needed.
According to Jerome Powell, the central bank is trying to stay rational. Cutting rates too early could force the Fed to raise them again later, and that would be inefficient. In the current situation, the best approach is to hold the line and watch the incoming data. The markets agree. Derivatives markets have lowered the odds of a September rate cut to 45%, while the probability of one or no cuts in 2025 has risen from 35% to 51%.
Dynamics of Projected Monetary Easing Acts
Source: Wall Street Journal.
As much as Donald Trump would like to see a rate cut, the Fed has at least two reasons to hold off. The US economy still looks strong. GDP grew by 3% in Q2, after a 0.5% contraction in Q1. Core PCE inflation, according to Bloomberg forecasts, accelerated from 2.3% to 2.5% in June.
US Inflation Trends
Source: Wall Street Journal.
Still, two FOMC members voted for immediate easing: Michelle Bowman and Christopher Waller. Both were appointed by Donald Trump. Their dissent raises questions about whether they’re dancing to the president’s tune.
Unfortunately for the White House, not everything is going as planned. Fierce resistance from Brazil forced Trump to abandon his idea of 50% tariffs on all imports from that country. And Jerome Powell is standing his ground. Keeping the federal funds rate at 4.5% led to a stock market selloff.
Weekly Trading Plan for EUR/USD
The S&P 500 correction could further fuel EUR/USD’s drop. The US victory in trade wars has restored confidence in the dollar. It is once again acting as a safe-haven asset, rising as global risk appetite weakens. The first short target at 1.149 has already been hit. The next one is 1.1325. Pullbacks to the upside should be viewed as opportunities to sell.
This forecast is based on the analysis of fundamental factors. It considers official statements by financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also taken into account.
Price chart of EURUSD in real time mode
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