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Politics could be one of the reasons why the Fed may cut interest rates in September. Donald Trump is firmly on his way to the presidency of the United States, and the Fed may want to throw some stumbling blocks in his way. Let’s discuss this topic and make a trading plan for the year. Euro vs US Dollar.
USD Weekly Fundamental Forecast
Jerome Powell surprised no one in Sintra, Portugal, when he said the strong U.S. economy was buying the Fed time, but markets took his speech as dovish. That sent Treasury yields, which had surged after the debate between Joe Biden and Donald Trump, lower and allowed EUR/USD bulls to push prices higher. Why did the Fed chairman catch investors’ attention?
Jerome Powell said recent reports have convinced the U.S. economy is starting to return to a deflationary path. In addition, the Fed wants to be more confident about this before it can start cutting interest rates. The market may have been impressed by the repeated reference to “progress” in fighting inflation. In the meantime, these statements are just the tip of the iceberg.
The Fed chairman allowed himself to criticize the White House. He said the Joe Biden administration was taking excessive risks by running a large budget deficit at full capacity. He said it was impossible to run such levels for long in a good economy. Jerome Powell urged the president to address the fiscal imbalance, though everyone understood he was not addressing a Democrat.
If Biden intends to extend the current preferential tax program from 2017 only to Americans making less than $400,000 a year, then everyone is on the same page for Donald Trump. His victory in the presidential election would further swell the budget deficit, which, according to the Congressional Budget Office, is expected to reach $1.9 trillion in 2024. That’s 7% of GDP.
Republican policies, including higher import tariffs, will be inflationary. They will force the Fed to keep interest rates at 5.5% for an extended period, increasing the risk of recession. This is why yields on US Treasury bonds are rising, creating a tailwind for the US dollar.
USDX and US Treasury Yields
Source: Trading Economics.
Investors are not only worried about Donald Trump returning to the White House, but also about the Federal Reserve. Unlike Joe Biden, Republicans have a habit of meddling in the central bank’s affairs. As a result, rumors have started to spread that the Fed may cut interest rates in September not only because the US economy is slowing down, but also to preserve the current government. When Jerome Powell spoke about the budget deficit, it turned into an argument for the imminent start of monetary expansion.
The euro was supported by the reluctance of core inflation and service prices to decline from their levels of 2.9% in May and 4.1% in June, as well as Christine Lagarde’s comments that the ECB’s job is not done yet and that the central bank must remain vigilant, and Philip Lane’s comments that the Governing Council needs more time.
Inflation in the euro area
Source: Financial Times.
EUR/USD Weekly Trading Plan
As is often the case, investors are overreacting. The Fed will remain apolitical, and the federal funds rate will be cut in September in the face of a slowing US economy. US employment data for June will confirm this, providing an opportunity for further market opening. Long deals On the Euro vs US Dollar The pair, and add them to the pair that started in the 1.071-1.072 area.
EURUSD currency pair real time price chart
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