If the US economy is truly thriving, as the US administration asserts, is there a need to further stimulate it with fiscal and monetary measures? The derivatives market perceives this as an erroneous move. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The external strength of the labor market masks underlying weakness.
- The US administration believes that the US economy is booming.
- The derivatives market is reducing the chances of a Fed rate cut.
- The return of the EURUSD pair above 1.18 will give a buy signal.
Weekly US Dollar Fundamental Forecast
Everyone has their own truth. In the wake of the June labor market report, the US administration declared that the US economy is experiencing robust growth, and it will improve even more once Donald Trump’s “Big, Beautiful Bill” is implemented. In this connection, the derivatives market has realized that the Federal Reserve will not cut the interest rate in July. However, after losing some ground, the EURUSD pair quickly recovered. It seems that a sensationalist headline can obscure the underlying vulnerabilities.
The employment sector expanded by 147,000, surpassing initial forecasts. Over the past three months, the figure has increased by an average of 150,000. Coupled with an unexpected drop in unemployment to 4.1%, this signals a still healthy labor market. However, as always, the devil is in the details. Private sector hiring has experienced a significant decline, marking its worst performance since October 2024, when Hurricanes Helene and Milton led to widespread job losses.
US Nonfarm and Private Payrolls Change
Source: Bloomberg.
Donald Trump has reiterated his position on the efficacy of his tariff policy, asserting that it will stimulate economic growth and revitalize the manufacturing sector. In fact, the opposite is occurring. The White House anticipates economic growth of 4.6–4.9% four years after the implementation of the Big Beautiful Bill Act. However, the Committee on Responsible Federal Budget estimates that it will increase the national debt to 127% of GDP by 2034. This additional debt will hinder investment and shrink the economy by 0.3% over the next decade compared to what it would have been in the absence of the president’s initiative.
The White House has expressed a strong need for lower rates to boost GDP. According to Scott Bessent, the Fed lacks a comprehensive understanding of its actions. The 3.76% yield on two-year bonds indicates that the federal funds rate of 4.5% is excessive. The Treasury Secretary anticipates that if it does not fall in July, there is a high probability of an aggressive 50 basis point cut in September.
Market Expectations on Fed Rate Cut
Source: Bloomberg.
The derivatives market has a different perspective. In the wake of the US employment report for June, the market reduced the probability of a resumption of the monetary expansion cycle in July from 24% to 5% and in September from 94% to 70%. The probability of three or more rate cuts in 2025 decreased from 56% to 30%, while the likelihood of one or fewer cuts increased from 9% to 25%.
In essence, the employment report prompted the Fed to take a breather during the summer months. The proposal to resume the cycle of monetary policy easing until September has been tabled. However, based on the market’s response, it appears that this is not sufficient to trigger a significant correction in the EURUSD pair. Concerns regarding tariff increases and the US administration’s intention to weaken the greenback have prompted a reevaluation of the Fed’s passive stance.
Weekly EURUSD Trading Plan
In such conditions, a return of the EURUSD pair above 1.18 could generate a buy signal. Long positions can be maintained if the primary currency pair manages to settle above 1.184.
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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