No matter how hard the White House tries to take the lead in 2025, the Federal Reserve remains the main driver for the U.S. dollar. In August, Jerome Powell stated that for the central bank, slowing employment is more important than accelerating inflation. In October, the Fed's head noted that a rate cut at the end of 2025 remains unresolved. As a consequence, the futures market fluctuated between increasing and decreasing the scale of monetary expansion, causing the EUR/USD to rise and fall.
Dynamics of Market Expectations Regarding Fed Rates
As autumn came to a close, a quite interesting situation emerged. Investors concluded that the peak of rates had been reached. Indeed, after threats of 100% tariffs on imports from China, Washington and Beijing quickly reached a consensus. The White House reduced tariffs on Swiss imports in exchange for investments. Finally, tariffs on agricultural products fell in response to rising prices.
The worst seems to be over. Why not reduce inflation expectations? This is exactly what happened in October and November. If we add to this the cooling of the labor market, as indicated by ADP and other sources, why wouldn't the Federal Reserve lower rates in December? In fact, the chances of such an outcome dropped from over 90% before the October FOMC meeting to 42%.
Dynamics of Inflation Expectations
Is it a paradox? Not at all! More and more members of the Federal Open Market Committee are speaking about caution in the absence of significant data. Yes, the end of the shutdown allows the government to begin publishing data. But all indicators will be lagging. Fresh information may not appear until the end of the year. The Fed can be understood. The central bank fears making a mistake in conditions of poor visibility.
However, maintaining the federal funds rate at 4% until the end of 2025 would only mean a temporary strengthening of the U.S. dollar. When 2026 begins, two problems will emerge for the United States. Due to the shutdown, its economy will slow significantly in the fourth quarter, with the effects only visible in the numbers in January and February. Additionally, Jerome Powell's approaching resignation as Fed chair will make Donald Trump more aggressive.
The occupant of the White House does not hide his desire to lower borrowing costs to nearly 1%. He is ready to do anything for that. The president's aggressiveness allows Morgan Stanley to predict three acts of monetary expansion in the first half of 2026. As a result, the main currency pair could soar to the level of 1.2300.
Technically, the daily chart of EUR/USD shows the formation of an inside bar, indicating uncertainty. A drop in quotes below its low at 1.1578 will increase the risks of a continued decline and allow for the accumulation of short positions. It would make sense to resume buying euros against the U.S. dollar if the main currency pair rises above its fair value of 1.1610.
