The Fed has made a hawkish cut. Jerome Powell noted that the rate had become neutral. However, there was also a dovish factor, as the labor market appeared weaker than the central bank had expected. Let us discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The Fed rate fell to a three-year low of 3.75%.
- Fed officials see only one rate cut in 2026.
- Donald Trump is dissatisfied with the Fed.
- Long trades on the EUR/USD pair can be opened on pullbacks, targeting 1.175 and 1.182.
Weekly US Dollar Fundamental Forecast
While Donald Trump uses the “divide and rule” principle, Jerome Powell is fostering dissenters. While one FOMC member voted against lowering rates in October, two did so in December. At the same time, 6 of the 19 FOMC members forecast 4% for year-end 2025, opposing further cuts.
Forecast for Federal Funds Rate Trajectory
Source: Bloomberg.
Donald Trump said that the 25 basis point cut in the federal funds rate was rather modest. This figure could have been doubled. However, Jerome Powell’s message to the US president and his future successor showed that monetary policy easing will be more difficult than it seems.
The Fed chairman stressed that the Fed was in a good position to wait and see, and that rates are currently in a neutral range that neither stimulates nor restrains the economy. This means that the bar for lowering them is high.
Fed Rate Target
Source: Wall Street Journal.
According to the FOMC minutes, seven out of 19 FOMC officials do not foresee any monetary expansion in 2026, while four others voted for one. At the same time, the US GDP forecast for next year was increased from 1.8% to 2.3%, and the inflation forecast was lowered from 3% to 2.5%. This is a rather counterintuitive decision, since by definition, a strong economy cannot have low inflation. However, when, according to Jerome Powell, officials see the same picture but view the risks differently, there is nothing surprising about it.
For example, the Fed chairman emphasized the weakness of the labor market. According to him, the official employment figures are overstated by approximately 60,000. The indicators look weaker than the central bank had supposed. These words became the very dovish remark the market had been waiting for. US Treasury yields plummeted after an initial surge, dragging the US dollar down.
In fact, in order to aggressively cut rates, Donald Trump and his people at the FOMC will need either a significant cooling of the economy or a return of inflation to the target. The former is not part of the US administration’s plans, and the latter will be incredibly difficult to achieve.
I believe that the EUR/USD pair’s behavior to the outcome of the last FOMC meeting in 2025 was excessively impulsive. Indeed, the Fed resumed purchasing $40 billion worth of bonds per month to put pressure on Treasury yields, and Jerome Powell expressed concern about the labor market. However, the target for further rate cuts has been raised.
Weekly EURUSD Trading Plan
The EUR/USD pair has reached the first bullish target of 1.17. The medium-term outlook for the main currency pair remains bullish, but a correction would not hurt. It makes sense to lock in some profits and use the pullback to open long positions with the targets of 1.175 and 1.182.
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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