Treasury Secretary Scott Bessent is urging the Fed to reduce interest rates by 150-175 basis points and has recommended that the Bank of Japan consider increasing rates. This divergence is weakening the US dollar, which is precisely what the US administration wants. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The Treasury is calling on the Fed to cut rates.
- Models do not confirm Scott Bessent’s words.
- The Treasury Secretary hints at a weaker dollar.
- Long trades on the EURUSD pair opened at 1.155 can be increased.
Weekly US Dollar Fundamental Forecast
Treasury Secretary Scott Bessent said that the Fed should cut the federal funds rate by 50 basis points at the September meeting. Then, Bessent stunned the markets with his comments about easing monetary policy by 150-175 basis points, stressing that any model would confirm this. However, models do not reflect this. The Treasury Secretary’s apparent misrepresentation is causing investors to flee the US dollar even more rapidly.
Scott Bessent is seen by investors as an adult in a room full of children. Donald Trump and his team are much more erratic. The US president is demanding that the Fed cut rates by 300–400 bps almost to zero. However, even the 150–175 bps cut proposed by the Treasury Secretary sent shockwaves across the markets. The fact is that borrowing costs have never been as low with such high inflation in the last 70 years. It appears that the Fed has been pursuing the wrong monetary policy all this time.
US Inflation and Effective Fed Funds Rate
Source: Bloomberg.
The most well-known model linking inflation, unemployment, and interest rates is the Taylor rule. According to this rule, monetary policy should be tighter than it is now. The federal funds rate should exceed 5%. Why does Scott Bessent want to see the rate at 2.75–3%?
Optimal Fed Rate Based On Taylor Rule and Actual Effective Fed Funds Rate
Source: Bloomberg.
The US finance minister has also suggested that the Bank of Japan is lagging behind the curve and should raise the interest rate. As a result, the yen surged after this statement. The markets received further confirmation that the US administration is committed to weakening the US dollar against major world currencies.
However, the EURUSD pair is struggling to break through the resistance level of 1.17. The euro may slide if the meeting between the US and Russian presidents in Alaska does not yield the anticipated results. The ongoing conflict in Ukraine and the resulting energy crisis have created significant headwinds for the eurozone economy. The rally of the main currency pair was driven by hopes for peace. However, if there is no substantial progress, the major currency pair will face a sell-off.
Meanwhile, not all FOMC officials are prepared to pursue aggressive monetary expansion. Atlanta Fed President Raphael Bostic expects only one more rate cut in 2025. Ostan Goolsbee, the President of the Federal Reserve Bank of Chicago, has expressed concern over the acceleration of services inflation, stating that it is an alarming sign. He also noted that the labor market remained robust.
Weekly EURUSD Trading Plan
At the same time, Donald Trump’s recent remarks continue to fuel discord among the Fed members. The US leader wants to appoint a new Fed chief in advance. The shadow Fed chair is likely to exacerbate market turbulence and maintain pressure on the dollar. In such conditions, the EURUSD pair will resume the upward trend. Against this backdrop, one may increase long trades formed at 1.155 and above.
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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