Market expectations of Fed rate cuts have become excessively optimistic. The Fed has signaled to investors that another scenario may unfold. A December cut has not been decided upon. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The FOMC now has a dissenting hawk.
- The Fed’s rate cut in December is still up in the air.
- The European Central Bank may surprise the markets.
- Positions on the EURUSD should be opened depending on the ECB’s decision.
Daily US Dollar Fundamental Forecast
The Fed showed hawkish rhetoric. Meanwhile, another dissenting voice appeared in the FOMC. Unlike Stephen Miran, a close Trump ally who voted for aggressive monetary expansion, Kansas City Fed President Jeffrey Schmid wanted to keep rates at their current level in October. What will happen in December? A vigorous battle between Fed members is looming, and expectations of it are supporting EUR/USD bears.
As a rule, it is quite reasonable not to fight the Fed, but markets often do so. It is noteworthy that the US regulator has expressed such explicit disapproval. It appeared that Jerome Powell was taking every possible measure to dispel investor expectations of a rate reduction to 3.75% in December, with odds exceeding 90%. The Fed chairman’s efforts have been successful. At one point, the odds fell to 65%, but later rose to 75%.
Market Expectations for Fed Monetary Expansion
Source: Bloomberg.
There is no guarantee that the monetary policy will be eased in December. The labor market is cooling down, but it is not collapsing. Inflationary risks persist. The current state of uncertainty, resulting from the shutdown and the lack of data, has prompted the Fed to proceed with caution. It has been a while since there has been such a strong consensus in favor of halting the cycle of monetary expansion.
As the October FOMC meeting approached, investors had conflicting views. Some speculated that the Federal Reserve would refrain from hastily reducing interest rates due to the ongoing government shutdown. In contrast, others were confident that the central bank would accelerate the pace due to the slowdown in the US economy. The Congressional Budget Office estimated the losses from the four-week shutdown at -1 percentage point of GDP. If the shutdown lasts six to eight weeks, these figures will rise to -1.5 percentage points and -2 percentage points.
Fed Funds Rate Trajectory
Source: Wall Street Journal.
Jerome Powell has dotted all the i’s and crossed all the t’s. For the Fed, caution is paramount, and the economic slowdown is considered transient. The fed funds rate trajectory will depend on which factor has a greater impact. The ongoing surge in AI investments, which is driving consumer spending and price growth, or the factors influencing GDP, including pressure from high borrowing costs, immigration, and trade policies.
In the near future, the markets will likely reevaluate the Fed’s rate trajectory, which is favorable for the US dollar. The EUR/USD pair will either decline or consolidate, depending on the decisions made by the European Central Bank (ECB). If the Governing Council meeting proceeds without unexpected developments, the euro is likely to decline. However, if Christine Lagarde signals a potential shift in rates, it could boost investor confidence and potentially strengthen the single currency.
Daily EURUSD Trading Plan
In the first case, one may sell the EUR/USD pair with the target at 1.155 and 1.15. In the second case, one may consider trading in the 1.158–1.17 range, selling the euro near the upper boundary and buying it on pullbacks.
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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