Disappointing US employment data has become a trap for EURUSD bears. The prospect of an economic downturn and the possibility of a significant reduction in the Federal Reserve’s interest rates have made the US dollar vulnerable. However, it has managed to find a way out of this situation. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Highlights and key points
- The panic started with the labor market and ended because of it.
- Fed officials are unlikely to cut rates aggressively.
- Donald Trump will continue to pursue changes to the Fed’s policies.
- The EURUSD pair’s selling at 1.094 brought profits.
Weekly US dollar fundamental forecast
Black Monday caused an adrenaline rush and panic attacks among investors who were seriously scared of recession and demanded the Fed to aggressively cut rates. However, the most significant decline in unemployment claims in nearly a year has provided a sense of reassurance and put an end to the Forex roller coaster. The EURUSD pair has stabilized and is beginning to chart a different course.
The labor market was the catalyst for the initial decline and the subsequent recovery. A significant increase in unemployment, reaching 4.3%, raised concerns about the potential for an imminent recession. Nevertheless, it was evident that the underlying cause for this shift was the result of temporary layoffs in the areas hit hardest by Hurricane Beryl. Therefore, the sharp decline in jobless claims in Texas was a major relief for investors.
The derivatives market has reduced the probability of a 50-basis-point reduction in the federal funds rate in September to 56%. At the height of the Black Monday crisis, the figure stood at over 80%. In 2024, the overall scale of monetary expansion is estimated at less than 100 bps, representing a significant decrease from the nearly 150 bps observed earlier in the week.
Anticipated Fed rate cuts
Source: Bloomberg.
Kansas City Fed President Jeffrey Schmid does not believe the labor market is weak. July figures cast doubt on the stability of the market, but many indicators point to strength. The official is not ready to support cuts in the federal funds rate, given the distance of inflation from the 2% target. Richmond Fed President Thomas Barkin argues that the central bank still has time to assess whether the US economy is normalizing or softening too quickly for the Fed to take decisive steps.
The anticipation of a 50-basis-point reduction in the federal funds rate in September is still a bit excessive. The labor market exhibited temporary weakness in July but anticipates a recovery in August. There is no recession in sight, which is positive for those betting on a decline in the EURUSD rate. Another factor to consider is Donald Trump’s recent remarks about the influence of the US President on the Federal Reserve’s decisions.
The Republican asserts that the head of state should at least approve the central bank’s decisions. Trump claims he has demonstrated financial success, possesses superior judgment, and has a stronger grasp of economic trends than Jerome Powell and his team. Additionally, he argues that the Fed has frequently made misguided decisions.
Ratings of US presidential candidates
Source: Wall Street Journal.
The latest ratings indicate an approximately 50% probability of a Donald Trump or Kamala Harris victory in November. However, suppose the Republican candidate returns to the White House and terminates the Fed’s autonomy. In that case, investors should brace for a more aggressive reduction in interest rates and a weaker US dollar.
Weekly EURUSD trading plan
However, the EURUSD pair has reached a consolidation point, with the release of US inflation data expected to provide further direction. Short trades initiated at 1.094 brought profits, but in such a market, it is necessary to set modest targets and focus on intraday trading until August 14.
Price chart of EURUSD in real time mode
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