For a long time, EURUSD quotes exhibited volatility, influenced by Donald Trump’s policies and Germany’s shift from fiscal restraint to spending. The US dollar shifts its focus back to domestic issues, and the EURUSD pair will respond to the Fed’s actions. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bundestag has approved Friedrich Merz’s project.
- The Fed can both raise rate expectations and lower them.
- Markets are hesitant, which means the risks of a roller coaster ride are high.
- Short trades can be opened if the EURUSD pair falls below 1.089.
Daily US Dollar Fundamental Forecast
The Bundestag’s approval of Friedrich Merz’s economic stimulus plan is a factor that has been played out in the Forex market. Against this backdrop, can EURUSD bulls start locking in profits? Asset managers increased their net long positions on the euro to a 5-month high, while hedge funds cut their short positions significantly. With this in mind, the FOMC meeting is a perfect trigger for the major currency pair.
EURUSD Performance and Speculative Positions on Euro
Source: Bloomberg.
It is a common belief that any central bank is home to a blend of hawks and doves. In the case of Jerome Powell, his demeanor and actions have led to comparisons with a duck. While he appears calm on the surface, he is hectically navigating muddy waters. While the US economy remains robust and inflation is decelerating, the ongoing trade tensions could pose significant challenges. However, the potential for trade wars to disrupt this stability remains a significant uncertainty. Meanwhile, traders are closely monitoring how FOMC members interpret these developments in their forecasts.
In December, US officials anticipated two acts of monetary expansion in 2025. According to Citibank, this may rise to three in March as the economy shows signs of cooling and the disinflationary trend recovers. Conversely, the Fed may reduce the forecast to one rate increase or less, as tariffs and trade wars heighten the risks of a stagflationary scenario where GDP loses momentum and the inflation rate rises.
The precise nature of the Fed’s decision remains uncertain, even to the markets. As recently as a week ago, the derivatives market was anticipating a 71 basis point rate reduction, equivalent to approximately three acts of monetary expansion. However, in the lead-up to the March FOMC meeting, this figure has decreased to 57 basis points. This shift occurred despite a series of disappointing economic reports, including consumer prices and retail sales figures.
Market Expectations for Fed Rate Cuts
Source: Bloomberg.
Investors have their doubts, but large institutions do not. In line with the OECD’s statement that the Fed’s cycle of monetary expansion is complete at least until the end of 2025 against a decelerating GDP and accelerating inflation in the US, Fitch Ratings expressed a similar viewpoint. The rating agency lowered its forecast for US GDP growth this year from 2.1% to 1.7% and next year from 1.7% to 1.5%. This projection marks a significant downward adjustment from the 3% growth rate experienced during the 2023–2024 economic cycle.
Daily EURUSD Trading Plan
The Fed will decide which path to take. Will it boost the cooling economy, or consider such a move premature? The forecasts indicate that one or no federal funds rate cuts will likely be the catalyst for unwinding long positions on the EURUSD pair. Conversely, if the US regulator signals three rate cuts, the major currency pair may surge to 1.1. Maintaining the December estimates could lead to significant volatility. The euro can be sold if the price plunges below 1.089.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
