Christopher Waller’s dovish comments have dealt a blow to EUR/USD bears. The federal funds rate may fall by 100 basis points to 2.75%. This is bad news for the US dollar. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The fed funds rate is too high for the labor market.
- There may be four rate cuts in 2026.
- Inflation will provide clues about the dollar’s outlook.
- Long positions on the EUR/USD pair can be opened at 1.1755.
Weekly US Dollar Fundamental Forecast
What will the Fed do: keep rates steady or cut them? How fast and how low will they fall? These questions are keeping financial markets on edge. Investors are looking for answers in employment and inflation data, as well as news about the US administration’s pressure on the Federal Reserve. Finally, they are looking for clues in the speeches of FOMC officials. One of them once again sent the EUR/USD on a roller coaster ride.
Christopher Waller, one of the candidates for Fed chair, said on the eve of his meeting with Donald Trump that the rate was too high for the labor market. Monetary policy needs to be eased to a neutral level that neither accelerates nor restrains the economy. It is approximately 100 basis points below the current level.
Forecasts for Fed Interest Rate Cuts
Source: Bloomberg.
Waller referred to four acts of monetary expansion, although the futures market expects two cuts in 2026, and the latest FOMC forecasts mention only one. As a result, after the Fed official’s dovish comments, US Treasury yields dropped, and bears failed to push EUR/USD lower.
Christopher Waller believes there is no rush to ease monetary policy until inflation shows signs of slowing down. There is no need to do anything radical. The Fed can move at a moderate pace. Consumer price growth will slow down in 2026.
US Inflation Change
Source: Bloomberg.
Stephen Miran, who calls for aggressive easing, agrees with Waller’s statement, calling inflation partly “phantom.” For example, the cost of portfolio management services is rising along with stock indices, as they are tied to asset values. If excluded, the PCE index would fall to 2.6%.
There is certainly some logic to such arguments. However, it is also necessary to consider factors that slow down rather than accelerate inflation. Nevertheless, when there is a directive from the US administration to lower interest rates, it is possible to turn a blind eye to certain aspects.
In my opinion, if Christopher Waller convinces Jerome Powell and John Williams that the labor market is more important than inflation, the number of doves will increase. This means that the chances of an aggressive rate cut will also rise. In this regard, the release of November consumer price data could boost the EUR/USD pair.
Figures close to 3% will prompt the market to focus on the dovish part of the FOMC’s forecast for the federal funds rate. As a result, Treasury bond yields, along with the US dollar, will likely slump, while the CPI will slow.
Weekly EURUSD Trading Plan
However, as long as investors remain confident in a January pause, the EUR/USD pair is unlikely to climb too high. Buying the euro on a breakout of the resistance level of 1.1755 and selling it if bulls fail to keep the price above the support level of 1.1735 are currently viable strategies.
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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