The reassessment of the federal funds rate trajectory is not the only reason for the US dollar’s dominance in October. When its counterparts are weak and the stagflation forecast has proven to be wrong, the EUR/USD pair faces a sell-off. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The US dollar benefited from the weakness of its rivals.
- The Fed may not cut rates in December.
- The US economy is not sliding into stagflation.
- Short trades on the EUR/USD pair can be opened as long as it trades below 1.1575.
Weekly US Dollar Fundamental Forecast
In order to predict the future, it is essential to analyze historical data. What were the factors contributing to the second-best monthly performance of the US dollar in October 2025? The weakness of its competitors was definitely a key one. The downgrade of France’s credit ratings exerted pressure on the euro, while expectations of large-scale stimulus in Japan caused the yen to be the worst-performing G10 currency. The adjustment in the Federal Reserve’s rate projections played a pivotal role in the EUR/USD pair’s sharp decline. Investors were reassessing their outlook on monetary policy.
G10 Currencies’ Performance in October
Source: Bloomberg.
In financial markets, hopes and disappointments are significant factors that influence investor behavior and market trends. A notable slowdown in US employment in the summer sparked growing expectations of an aggressive cycle of monetary expansion by the Fed. Investors expected the Fed to cut the interest rate in October and December. The speech given by Jerome Powell, in which he addressed outstanding issues related to a potential rate cut at the end of the year, caught the markets off guard. The probability of the December cut decreased from over 90% to 69%, while Treasury yields surged, and the US dollar strengthened.
10-Year Treasury Yield
Source: Bloomberg.
Indeed, Kansas City Fed President Jeffrey Schmidt was not alone in arguing for keeping the federal funds rate at 4.25%. His colleagues from Cleveland, Beth Hammack, and Dallas, Laurie Logan, said they would prefer to keep the rate unchanged. Only Christopher Waller continues to reiterate that inflation will be temporary and that the cooling of the labor market calls for monetary policy easing.
The US dollar also gained support from Jerome Powell’s statement that the shutdown requires the Fed to exercise caution. The longer the government shutdown lasts, the less likely it is that the rate will reach 3.75%. All the better for the US dollar.
However, the weakness of the US dollar’s counterparts and the reassessment of the federal funds rate trajectory are not the only reasons for the USD index rally. In April, after the Liberation Day, the market reached a clear consensus that tariffs would spur inflation and slow down the US economy. The stagflation backdrop allowed investors to sell the US dollar.
To the disappointment of most, neither of these scenarios happened. Prices are not rising as fast, and GDP, according to a leading indicator from the Federal Reserve Bank of Atlanta, may expand by 3.9% in the third quarter. Pantheon Macroeconomics cites lower tariffs as the main reason. Their estimated value exceeds 17%, while the actual value, due to tax evasion, is 12.5%. Import duties are not so destructive to the US economy, which means that greenback sales in the first half of the year were off the mark.
Weekly EURUSD Trading Plan
Against this background, it only makes sense to resume buying the EUR/USD pair if the price rises above 1.1575. Until then, it is better to maintain and increase short positions.
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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