The Fed has plenty of room to cut interest rates, while the ECB is likely to keep them unchanged until 2027. The divergence in monetary policy suggests that buying the EUR/USD pair is a sound strategy. Furthermore, there is the Trump factor to consider. Let’s discuss these topics and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Trump has named two candidates for Fed chair.
- The USD index may fall by 3% in 2026.
- The ECB will keep rates unchanged until 2027.
- Long positions on the EUR/USD pair can be opened on a breakout of 1.175.
Weekly US Dollar Fundamental Forecast
Donald Trump said that the US should have the lowest interest rate in the world, below 1%. The US leader is back to his old tactics, reminding investors of the US dollar’s vulnerable position. The Bloomberg consensus forecast suggests a 3% decline in the USD index in 2026. According to Deutsche Bank, the Fed has room to cut interest rates, so the US currency will likely continue to weaken. However, the EUR/USD pair is consolidating ahead of the release of labor market statistics.
Forecasts for EUR, JPY, and GBP
Source: Bloomberg.
On the contrary, the ECB has no more room to ease monetary policy. At least, that is what experts surveyed by Bloomberg believe. 60% of respondents are confident that the deposit rate will rise rather than fall. The odds are significantly higher than in the previous survey, when about a third of experts predicted monetary tightening. Overall, the consensus forecast indicates that borrowing costs will likely remain at 2% until 2027. If so, the EUR/USD pair’s performance will entirely depend on the US.
The US dollar rate will be influenced by both monetary and non-monetary factors, including Donald Trump’s commitment to combat high interest rates. While Trump previously favored Kevin Hassett as the new Fed chair, he has recently said, “I think the two Kevins are great,” referring to former FOMC member Kevin Warsh. The US leader was likely taken aback by the director of the National Economic Council’s speech. The latter stated that the US president has the right to express his opinion, but it will not influence the Fed’s decisions.
It is unlikely that Kevin Hassett wants to upset Donald Trump, because in that case, he can forget about becoming Fed chair. Most likely, he is building his authority among other FOMC members by constantly emphasizing the central bank’s independence. The game is delicate, but the markets have understood it. They continue to bet on a weakening of monetary policy, and the divergence favors EUR/USD bulls.
Forecasts for Fed Interest Rate Trajectory
Source: Bloomberg.
Moreover, one of the dissenting FOMC members in December showed that he was not a confirmed hawk. Chicago Fed President Austan Goolsbee, who voted to keep the federal funds rate unchanged, said he did so as a precautionary measure. In other words, monetary expansion should continue, but not at the same rapid pace as before.
The Fed lacks data, and the US employment reports for October and November will eliminate this problem. The futures market is giving a 50% probability of monetary policy easing in March. Disappointing statistics will increase these odds and weaken the US dollar, while strong statistics will strengthen the US currency.
Weekly EURUSD Trading Plan
Ahead of an important report, it is better to stay out of the market. However, you can take an aggressive approach and buy the EUR/USD pair if the price pierces the resistance level of 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
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