The EUR/USD pair’s recent decline has been largely driven by interest rate expectations. Investors continue to price in a more aggressive Fed policy than its global peers. If those expectations prove overstated, the US dollar could face a sharp reversal as investors unwind their net long positions, which have reached their highest level since 2015. Let’s examine the current market environment and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The risks for the Fed have taken a 180-degree turn.
- Fluctuations in the EUR/USD pair are linked to interest rates.
- The lack of detail in the FOMC minutes is bearish for the US dollar.
- Long positions on the EUR/USD pair can be opened if the price pierces 1.1460.
Weekly Fundamental Forecast for Dollar
Traders should get used to the fact that markets are constantly shifting. Even central banks are noting this. According to FOMC member Christopher Waller, the risks the Fed faces have completely shifted over the past year. While a cooling labor market led to rate cuts in the second half of 2025, the priority now is to bring inflation back to target. The question of how quickly the Fed will do this is extremely important for the EUR/USD pair.
The ISM Services PMI data confirmed Waller’s remarks. The index fell short of forecasts but remained in expansionary territory. However, the fastest growth in the employment index since 2024, as well as the price component falling below 70 for the first time since February, prove that Christopher Waller is right. The labor market has stabilized, and the Fed can now focus on fighting inflation.
Services PMI and Employment Index
Source: Bloomberg.
The futures market remains nearly certain that the federal funds rate will rise by 25 basis points in 2026. The probability of this outcome is estimated at 76%. The probability of two rounds of monetary tightening stands at 34%. Investors believe the Fed will act more aggressively than other central banks, allowing speculators to build up net long positions in the US dollar, which have reached their highest level since 2015.
Speculative Positions on US Dollar
Source: Bloomberg.
According to Monex, the US dollar’s strength is primarily driven by the interest rate narrative. Of course, other factors are also at play, including US exceptionalism and demand for safe-haven assets. The latter remains particularly relevant as the Islamic Revolutionary Guard Corps continues its attacks on tankers in the Strait of Hormuz. That said, Washington is likely to downplay the situation, emphasizing that there have been no casualties and no meaningful escalation of tensions in the Middle East. At the same time, a strengthening European economy should narrow the GDP growth gap with the US, gradually weakening the narrative of American exceptionalism that has supported the dollar.
Indeed, EUR/USD’s sharp decline in the second half of June was driven by a reassessment of the Fed’s policy outlook. By the end of 2025, the Fed was easing monetary policy. However, after Kevin Warsh took office, investors began pricing in an aggressive tightening cycle. As the market gradually recognized that those expectations had become overly optimistic, the euro regained part of its losses.
Will the minutes from the June FOMC meeting provide fresh clues? If the tone of the minutes proves as hawkish as the accompanying policy statement, it could reinforce expectations that Kevin Warsh will be reluctant to ease policy—or may even be willing to raise interest rates if necessary. Conversely, a less hawkish tone could undermine those expectations, dealing another blow to the US dollar.
Weekly Trading Plan for EUR/USD
The decline in EUR/USD quotes toward 1.14 allowed traders to add to long positions. If the major currency pair returns above 1.146, it will provide a new opportunity to buy the euro.
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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Source: Original Article
