Most of the FOMC hawks remained silent, while Jerome Powell’s concerns about the cooling labor market triggered a sell-off in the US dollar. The Fed’s balance sheet growth also put downward pressure on the US currency. Let’s discuss these topics and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- FOMC hawks’ indecision has dragged the US dollar down.
- Balance sheet expansion threatens the Fed’s autonomy.
- The derivatives market does not rule out a rate cut in March.
- Traders can lock in profits in the 1.17–1.175 range.
Weekly US Dollar Fundamental Forecast
The Federal Reserve’s recent policy decisions have been less aggressive than anticipated, leading to concerns about its autonomy. In light of Jerome Powell’s cautionary remarks regarding the labor market and the surge in unemployment claims, which surpassed levels seen during the pandemic, the EUR/USD pair has reached its bullish targets of 1.17 and 1.175.
Prior to the December FOMC meeting, several officials voiced significant concerns about inflation. The market had anticipated five dissenting hawks, but there were only two. The rest of them did not take the risk. If they have not taken action, will they do so in 2026? Investors seem to harbor some skepticism about this question.
Fed’s Balance Sheet
Source: Bloomberg.
The Fed has returned to expanding its balance sheet. Over the past four years, with the exception of a temporary pause due to the collapse of Silicon Valley Bank in early 2023, it has been steadily shrinking. The purchase of $40 billion worth of bonds each month is likely to exert pressure on Treasury yields. The Treasury may not be concerned about signals from the debt market that it is spending too much. This strategic decision is expected to have a positive short-term impact on GDP. However, it will be a negative factor for inflation.
This is particularly relevant in light of the Fed Chair’s replacement. The Kevin Hassett-Scott Bessent duo will work to promote the interests of the Trump administration. The US president has stressed the need to lower the federal funds rate to 1%. Following the most significant surge in unemployment claims since 2020, the futures market adjusted its expectations of monetary policy easing from April to March, increasing the likelihood of three acts of monetary expansion in 2026 from 30% to 40%. Against this backdrop, the US dollar has collapsed.
Expected Scale of Monetary Expansion by Fed
Source: Wall Street Journal.
Jerome Powell spoke too much about the risks of a weakening labor market at the press conference following the last FOMC meeting in 2025. Investors now believe that the slightest signs of a decline in employment will lead to aggressive rate cuts. Obviously, the statistics on October and November non-farm payrolls will dot the i’s and cross the t’s. The BLS plans to publish the data on December 16.
A couple of days later, the ECB will hold a meeting. The European Central Bank has made it clear that it does not plan to cut rates. However, the EUR/USD rally may force it to reconsider. The Governing Council expects inflation to slow in 2026, followed by a return to the target in 2027. A stronger euro will derail this forecast. Perhaps it is time for the ECB to adopt a more dovish stance.
Weekly EURUSD Trading Plan
I think that after several days of growth, the EUR/USD pair will likely consolidate ahead of important events. As for now, it would be better to refrain from opening trades or locking in profits on long positions in the range of 1.17–1.175.
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.
