Strong data and hawkish rhetoric from FOMC members should have pushed the EURUSD pair down. However, as soon as Christopher Waller announced that the Fed would cut rates in July, the currency pair surged. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The US economy remains stable.
- The Fed needs time to assess the impact of tariffs.
- The dovish members of the FOMC are advocating lower rates.
- Long trades on the EURUSD pair can be considered on a breakout of 1.164.
Weekly US Dollar Fundamental Forecast
Markets are increasingly focusing on eroding confidence in the US dollar rather than the Fed’s federal funds rate trajectory. This was the final thought in the previous article. Deutsche Bank agrees with this view. According to the bank, the drama surrounding Donald Trump’s attacks on Jerome Powell will continue to create headwinds for the greenback and Treasury bond yields until it ends one way or another. Notably, the EURUSD pair proves this statement.
The decline in jobless claims and the 0.6% rise in retail sales in June exceeded all Bloomberg experts’ forecasts and should have convinced us that the Fed can afford to sit on the sidelines. FOMC member Adriana Kugler believes it is appropriate to keep rates on hold for some time, as tariffs are likely to accelerate inflation. Her view is shared by Federal Reserve Bank of Atlanta President Raphael Bostic and Federal Reserve Bank of New York President John Williams.
After the release of strong macroeconomic data, the derivatives market lowered the chances of a September rate hike from 94% in early July to 54%.
Expectations for Fed Rate Cut
Source: Bloomberg.
However, as soon as Christopher Waller spoke, the likelihood increased to 60%, prompting the EURUSD pair to increase. The FOMC official stated that the Fed should not wait for the labor market to cool down significantly. The risks of inflation are minimal, and the central bank should consider cutting rates in July and then at least once more before the end of 2025.
Christopher Waller is one of Donald Trump’s candidates for the position of shadow Fed chair. Given the markets’ positive response to his dovish rhetoric, it appears probable that he will be appointed as the head of the US central bank. This aligns with the US president’s strategic objectives: to create a media frenzy surrounding Jerome Powell, erode confidence in the Fed, and weaken the US dollar.
While the Federal Reserve is not a one-person authority, Christopher Waller appears to be garnering support from some of his colleagues. For instance, Dallas Fed President Mary Daly stressed that the central bank should consider accelerating the reduction of interest rates, implying two rate cuts in 2025.
Market Expectations for ECB Pause
Source: Bloomberg.
Should the Fed resume its monetary expansion cycle in September or even in July, the EURUSD pair will likely resume its upward trend. An increasing number of Bloomberg experts say that the ECB may delay its decision to cut the deposit rate until December, citing the impact of tariffs as a potential factor in its decision-making process.
Weekly EURUSD Trading Plan
The US president’s pressure on Jerome Powell is likely to limit the US dollar’s strength. Concurrently, indications of a cooling US economy will fuel a rally in the EURUSD pair towards 1.2 and 1.22. If the major currency pair breaks through the resistance level of 1.164, long positions can be opened.
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 broker. 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 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
