The Bank of England’s decision to follow the Fed and put its monetary policy cycle on pause exacerbates the debt crisis in the UK. This has prompted other regulators to trim interest rates, supporting the US dollar. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The US economy has reached growth limits, and inflation is accelerating.
- The reluctance of the labor market to cool down will force the Fed to postpone rate cuts.
- The Bank of England’s attempt to follow the Fed will fail.
- The EURUSD pair may collapse to 1.012 and 1.000 on the back of a strong jobs report.
Daily US Dollar Fundamental Forecast
The market discounts everything. The US stock indices’ inability to continue rallying amid the surge in Treasury yields conveys a critical message: the US economy has hit its growth ceiling. New attempts to stimulate it will lead to inflation and force the Fed to abandon rate cuts, resulting in a significant decline in EURUSD quotes.
The equity market viewed Donald Trump’s presidential victory as a dream come true. Investors had been optimistic about the potential for GDP acceleration and an increase in corporate earnings due to fiscal stimulus and deregulation. However, the market’s reaction was muted, as the rise in Treasury yields was not perceived as significant.
US Treasury Yield and Federal Funds Rate
Source: Bloomberg.
Meanwhile, the market would love to live its dreams, but it has to face reality. The impact of Donald Trump’s policies has been a subject of much discussion. His trade tariffs and anti-immigration policies have the potential to cool the economy, while fiscal stimulus could lead to an increase in government debt and the supply of government bonds. If demand does not keep pace, it may result in lower prices and higher yields. Richmond Fed President Thomas Barkin attributes the debt market situation to fiscal policy rather than to the Fed’s intention to pause.
Conversely, the markets are expressing less confidence in a further reduction in the federal funds rate. The derivatives market offers a 16% probability that the initial Fed move in 2025 will be followed by a second one, despite the December FOMC projections indicating two rate cuts.
According to Bank of America, if the labor market stops cooling, the Fed may conclude the cycle of monetary expansion. This underscores the critical importance of the employment statistics for December. According to Bloomberg experts, the employment indicator is expected to slow down from 227,000 to 165,000, with estimates ranging from 100,000 to 268,000.
US Nonfarm Payrolls Data
Source: Bloomberg.
A consensus growth scenario indicates that the US economy generated 2.1 million new jobs in 2024, which is less than the 3 million added in 2023 but more than the 2 million created in 2019, prior to the pandemic. The labor market is robust, inflation is accelerating, and the question arises: why should the Fed cut interest rates?
Meanwhile, other central banks are compelled to follow suit. A notable example of this is the UK’s debt crisis. The Bank of England has failed to align its policies with those of the Fed, leading to higher borrowing costs that the UK economy could not sustain. The same is true for the eurozone.
Daily EURUSD Trading Plan
The US Federal Reserve and the European Central Bank have divergent monetary policies, which will continue to push the EURUSD pair lower. The US labor market statistics for December will likely accelerate or decelerate this process. On the back of strong data, one can consider short trades with the target at around 1.012 and 1.000, while weak data will likely create an opportunity to open short-term long trades once the pair breaches the resistance level of 1.0325.
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. 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 2004/39/EC.
