Speculation that December’s rate cut may be the last and increased safe-haven demand due to the partial US government shutdown allowed EURUSD bears to push the pair lower. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed is starting to factor in Donald Trump’s policies.
- December’s Fed rate cut could be the last.
- The shutdown strengthens the demand for safe-haven assets.
- The EURUSD pair is moving toward 1.03.
Weekly US Dollar Fundamental Forecast
Tariff-related concerns are beginning to impact the Fed’s decision-making, and President Donald Trump is implementing a government shutdown as a political maneuver. The president-elect rejected House Speaker Michael Johnson’s proposal to fund the government through March 14 and instead called for a strategy that includes raising the national debt ceiling. This proposal was rejected by a vote of 235 to 174. As a result, the federal government will partially shut down, and the resulting uncertainty is driving demand for safe-haven assets and propelling the EURUSD exchange rate to decline further.
Notably, Donald Trump’s political motivations are not the primary factor in this situation. He referred to the government shutdown as a “Biden shutdown,” given that it is only occurring under the leadership of the current president. Trump often takes credit for the accomplishments of the current administration and voices criticism for its policies they disagree with. One area where the economy is thriving is a testament to the former. US GDP accelerated to 3.1% in the third quarter, surpassing forecasts and the previous estimate of 2.8%. A leading indicator from the Atlanta Fed signaled a continued expansion of 3.2% in the fourth quarter.
Donald Trump’s election victory was facilitated by his criticism of high inflation under Joe Biden. However, the Republican administration’s policies of fiscal stimulus and tariffs are pro-inflation and are beginning to influence the views of FOMC officials, according to Jerome Powell. Some policymakers have included estimates of the effects of the new White House chief’s economic policies in their forecasts. Notably, the Fed has shown only two acts of monetary expansion in 2025, causing the derivatives market to question whether the rate-cutting cycle is over.
Market Expectations on Fed Funds Rate
Source: Wall Street Journal.
Despite the criticism it has received, I believe the Fed’s decision to cut interest rates was the correct one. The central bank is well aware that market fluctuations are driven by investor expectations. Investors have expressed concerns about the future of the economy, questioning if the December rate cut will be the last one and if the Fed will tighten monetary policy further.
As a result, stock indices slumped, US Treasury yields soared, and the US dollar strengthened, leading to tighter financial conditions. This may contribute to a slowdown in inflation.
US Financial Conditions
Source: Bloomberg.
The surge in demand for safe-haven assets, triggered by the turbulence in financial markets and speculation about the conclusion of the Fed’s cycle of monetary expansion, along with the escalating risks of a central bank tightening monetary policy, has contributed to the EURUSD pair’s decline.
Weekly EURUSD Trading Plan
Investors have disregarded the potential consequences of the shutdown, which could slow US economic growth and prompt the Fed to reduce interest rates. Against this backdrop, the EURUSD pair may reach the target of 1.03. The recommendation is to sell.
Price chart of EURUSD in real time mode
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