The ECB is set to raise interest rates in 2026, while the Fed will most likely cut rates at least twice. The EUR/USD pair has found its direction, but in the short term, everything can change. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The ECB will likely increase the deposit rate in 2026.
- The Fed will cut rates but signal a pause.
- Jerome Powell’s influence on the markets is waning.
- Long trades on the EUR/USD pair can be opened on a rebound from 1.161 and 1.1585.
Weekly US Dollar Fundamental Forecast
The EUR/USD pair has faced a rollercoaster ride ahead of the FOMC meeting. The euro received strong support but failed to reach above its December highs. Investors are concerned about Jerome Powell’s hawkish rhetoric, which, in fact, should not be frightening, as the Fed will have a new chairman soon.
Governing Council member Isabel Schnabel’s speech was positive news for the EUR/USD pair. The economist finds market expectations of a deposit rate hike appropriate for some time. However, the acceleration of the European economy amid soaring consumer spending, business investments, and government spending on defense and infrastructure will force the ECB to tighten its monetary policy.
German 10-Year Bond Yield
Source: Bloomberg.
Following Schnabel’s speech, the futures market reduced the probability of a deposit rate cut by mid-2026 from 40% to 10%. Conversely, the probability of a rate hike by the end of next year jumped to 33%, and the yield on 10-year German bonds rose to its highest level since March. Against this backdrop, EUR/USD bulls pushed the price higher in the short term.
Jerome Powell, known for his ability to find compromise within the FOMC even in difficult times, will have to do the impossible — harmonize the views of hawks and doves. The former are concerned about high inflation, while the latter are worried about the labor market’s weakness. The price of this fragile truce will most likely be a 25 bp cut in the federal funds rate to 3.75%, followed by a pause.
At first glance, this scenario appears favorable for the US dollar. The EURUSD pair may respond as it did after the two previous FOMC meetings, when the main currency pair unexpectedly fell amid monetary policy easing. However, there is always a but in this imperfect world.
Chances of Candidates for Fed Chair
Source: Nordea Markets.
Kevin Hassett, the leading candidate for Fed chair, may join the Committee as early as February. If so, how significant will Jerome Powell’s farewell speech be? Probably less important than it was before.
With a dove in the Fed chair, the US dollar risks weakening significantly in the medium and long term. However, the US currency may strengthen after the December FOMC meeting. Traders should expect choppy trading in the EUR/USD pair and be prepared to swing frequently between long and short positions.
Weekly EURUSD Trading Plan
However, the EUR/USD pair is likely to resume its upward trajectory in the long term. As a result, long positions can be considered on a rebound from key support levels of 1.161 and 1.1585.
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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