Doubts about American exceptionalism, expectations of a Fed rate hike in 2027, and the potential for a further sharp rise in US Treasury yields have triggered a countertrend move in the EUR/USD. Let’s examine the drivers behind this shift and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed may not raise rates in 2027.
- Chip sell-offs are weighing on the US dollar.
- The inflation report will dot the i’s and cross the t’s.
- A slowdown in the CPI may offer an opportunity to buy the euro with targets of 1.1240 and 1.1280.
Daily Fundamental Forecast for Dollar
A decline in semiconductor stocks and Treasury yields, combined with short-covering ahead of a key US inflation report, has allowed the EUR/USD to rebound above 1.12. The semiconductor sector accounts for one-fifth of the S&P 500’s market cap and roughly one-third of its revenue. It is also a key pillar of American exceptionalism, which has consistently supported the US dollar through the country’s stronger economic growth and the appeal of its financial assets. These factors helped the dollar index climb to a 17-month high.
However, Treasury yields are retreating, while the sell-off in Asian chipmakers is spreading to US equity markets. The Philadelphia Stock Exchange Semiconductor Index is declining, undermining investor confidence in American exceptionalism and adding to the pressure on the dollar.
PHLX Semiconductor Sector
Source: Bloomberg.
At the same time, Treasury yields are declining. Even if the US economy is strong, it would be challenging to withstand borrowing costs at 5% or higher. According to Morgan Stanley, this would require nominal GDP growth of 5.5–6.5% over the long term.
John Williams, president of the Federal Reserve Bank of New York, also sees little need to raise interest rates above 4.25%. In his view, the inflationary effects of tariffs and the oil crisis are gradually fading. Unlike headline consumer prices, core inflation shows no signs of a significant acceleration. Williams prefers to monitor how artificial intelligence affects the CPI. If inflationary pressures remain contained, further monetary tightening may not be necessary in 2027.
Market Expectations for Fed Funds Rate
Source: Bloomberg.
As a result, derivatives markets have lowered the probability of three Fed rate hikes over the next 12 months from 76% to 73%. At the end of September, investors had been pricing in four rate increases over the course of the Fed’s tightening cycle. A downward revision in expectations for the scale of monetary tightening is a bearish factor for the US dollar. The EUR/USD pair might have launched a counteroffensive sooner were it not for France’s budget crisis and the resilience of American exceptionalism.
Political uncertainty and fiscal challenges have prompted the IMF to lower its 2026 GDP growth forecast for France to 0.4%. By comparison, Germany’s economy is projected to expand by 1.1%, while the UK is expected to grow by 1.2%. The US economy appears considerably more resilient, leaving the Fed’s reluctance to raise interest rates as one of the few potential catalysts for a correction in the EUR/USD.
Daily Trading Plan for EUR/USD
The inflation report and Kevin Warsh’s speech should provide further clues about the Federal Reserve’s policy outlook. Headline CPI inflation is expected to accelerate from 3.4% to 3.6%, while core CPI is forecast to rise from 2.4% to 2.5%. A softer-than-expected reading could create an opportunity to buy the EUR/USD at market prices, targeting 1.124 and 1.128. If the figures come in line with forecasts, traders could look to buy the pair on a pullback. Conversely, a sharp acceleration in inflation would strengthen the case for selling the EUR/USD.
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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