Keeping interest rates unchanged in October while signaling a possible hike in December. Investors consider this the most likely outcome of the FOMC meeting. This scenario creates opportunities to sell EUR/USD on positive news. Let’s discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- Positive news fails to support the euro.
- The Fed will not raise rates despite strong economic data.
- Fellow Fed officials helped Kevin Warsh preserve his credibility.
- Short EUR/USD positions opened at 1.118 should be held.
Weekly Fundamental Forecast for Dollar
Markets are increasingly convinced that the Fed will maintain a hawkish tone after leaving interest rates unchanged in October. This creates opportunities to sell EUR/USD on positive news. When everyone is buying, it can be an excellent opportunity to sell. As a result, neither Moody’s decision to maintain France’s credit rating, nor strong German business expectations data from the IFO Institute, nor falling oil prices and Treasury yields prevented the euro from plunging.
France’s Credit Ratings
Source: Bloomberg.
Investors believe that raising the federal funds rate at every meeting would contradict the FOMC’s latest projections. Moreover, energy prices are the main driver of inflation, and tighter monetary policy will not help the Fed increase oil production. If the central bank genuinely intended to continue its monetary tightening cycle, officials would have done more to prepare markets for such a move.
One could, of course, point to Kevin Warsh’s call for less talk and more action. However, if New York Fed President John Williams and other Fed officials had not started discussing a pause, markets would likely have continued expecting an October rate hike until the very last moment.
Indeed, economic data supported such a move. Inflation has accelerated and remained above the 2% target since the beginning of 2025. The economy is going strong, partly thanks to artificial intelligence technologies, while the labor market remains resilient. Since the new Fed chair wants investors to focus on economic data rather than Fed statements, they had good reason to expect further rate hikes. However, that would have been a costly mistake.
The Treasury market could have put Kevin Warsh in an awkward position. The Fed chair previously argued that it could do some of the central bank’s work. However, falling Treasury yields mean that the Fed will have to do the job itself.
Forecasts of Market Reactions to the Midterm Elections
Source: Bloomberg.
Interestingly, one reason for falling Treasury yields is the growing likelihood of a Democratic victory in the US midterm elections. More than half of Bloomberg’s survey respondents believe Treasury yields would fall over the next 12 months if a blue wave occurs. If Congress remained divided, only 36% expected yields to decline. Conversely, 60% of respondents believed a red wave would trigger an S&P 500 rally. Democrats are expected to slow economic growth because they oppose deregulation and tax cuts.
Weekly Trading Plan for EUR/USD
The Fed is not guaranteed to strike a hawkish tone after keeping rates unchanged in October. A breakout below the lower boundary of the EUR/USD consolidation range of 1.118–1.126 could prove false. For now, however, it makes sense to hold short positions.
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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