Markets Fear Fed Hawkish Surprise. Forecast as of 18.06.2025
Despite President Trump’s calls for action, the US Federal Reserve is unlikely to cut interest rates in June, as the central bank’s role is not to address fiscal issues. Inflation expectations are more significant in this regard. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The Fed should not solve fiscal problems.
- Rising inflation expectations are a reason to keep rates unchanged.
- Markets fear a hawkish surprise from the Fed.
- A return of the EURUSD pair to the 1.149-1.161 range will generate a buy signal.
Daily US Dollar Fundamental Forecast
If a general consensus concludes that inflation will rise, it will rise. Escalating conflict in the Middle East is driving up inflation expectations in the US and increasing the likelihood of a hawkish surprise from the Fed in June. This strategic move enables the US dollar to regain its competitive edge. The false breakout of the upper boundary of the 1.149–1.161 trading range allowed traders to open positions on the EURUSD pair.
The US president has called upon the Fed to reduce interest rates by one percentage point, citing low inflation and a 7% increase in public debt over the past eight months, amounting to $776 billion. According to Donald Trump, a 2% decrease in borrowing costs could save Washington $600 billion in debt servicing. However, the central bank’s primary role is not to address fiscal issues. The regulator is not concerned about the absence of an acceleration in consumer prices to rise in May, as inflation expectations signal that inflation will pick up later.
US Inflation Expectations
Source: Wall Street Journal.
This could potentially lead to a self-fulfilling prophecy. If the Fed were to lower rates today, it would be compelled to raise them tomorrow, which would have adverse economic consequences.
The situation is further complicated by the delayed impact of tariffs and the ongoing conflict between Israel and Iran. Front-loading of imports ahead of the introduction of duties allowed retailers to obtain goods at pre-tariff prices, refraining from raising them for some time. However, this time has a limit. Following President Trump’s call for more than a ceasefire in the Middle East, oil prices skyrocketed. The US administration is considering several options, including a potential US strike on Iran, which would further accelerate inflation.
As expected, investors are expressing serious concern regarding the Fed’s downward revision of its federal funds rate forecast. In March, four FOMC members did not anticipate any changes until the end of 2025, four predicted one act of monetary expansion, and the remaining eleven predicted two or more rate cuts. The median forecast could be adjusted from two to one cut if just a couple of officials change their assessments.
Fed Interest Rate Change
Source: Wall Street Journal.
Markets focus on the Fed’s dot plot and ignore the other two factors. Forecasting is an effective tool in stable market conditions, and the Fed may not always be correct in its assessments. In June 2024, the median estimate changed from three acts of monetary expansion to one. However, in September, the interest rate fell by 50 basis points.
Daily EURUSD Trading Plan
The EURUSD pair has declined due to concerns about a hawkish surprise from the Fed. However, even if this occurs, the correction is unlikely to be significant. The euro’s return to the 1.149–1.161 trading range will be a reason to buy the euro. Long trades can be opened if the FOMC maintains its forecast of two acts of monetary expansion in 2025.
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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