Everything has been thrown into disarray on the international currency market. Those who believed that the end of the US government shutdown would clear the fog for the Federal Reserve and investors were mistaken. Uncertainty has reached its peak. The futures market has cut the odds of monetary policy easing in December from 62–72% during the shutdown to less than 50%. In contrast, most Reuters experts remain confident that the federal funds rate will be lowered from 4.00% to 3.75% by year-end. EUR/USD seems to trust the analysts more than the derivatives market, soaring above the 1.16 mark.

According to Reuters, 80% of surveyed economists — 84 out of 105 — expect a rate cut in December. The share of such respondents has grown significantly since the October survey. Despite sharp divisions within the Fed, 70% of experts say the US labor market has remained at the same level as in the summer, while the remaining 30% believe it has cooled further. That should push the Fed to act.

Federal funds rate dynamics and forecasts

Economists project that US GDP growth will slow from 3.8% in the second quarter to 2.9% in the third and just 1% in the fourth. The shutdown has negatively affected the economy, and the narrowing divergence in GDP growth between the US and the eurozone underpins the upward trend in EUR/USD.

Governing Council member Isabel Schnabel believes the eurozone economy is recovering and expects significant fiscal stimulus to further boost GDP. In such an environment, inflation is unlikely to slow — quite the opposite, prices may rise. This allows the influential official to argue that the deposit rate is currently at the right level. A rate cut would only be justified by a serious shock — something not yet on the horizon.

Thus, on one hand, investors see a US economy losing steam under the pressure of tariffs and the shutdown. On the other hand, they observe a eurozone economy resilient to import duties and gaining momentum. The ECB has completed its cycle of monetary easing, while the Fed continues it — though the question of a rate cut now hangs by a thread.

In the September FOMC forecasts, ten officials projected the federal funds rate to fall to 3.75%, while nine expected it to stay at 4.00%. The "hawks" now argue that continued monetary expansion would make it harder to bring inflation back to the 2% target, while the labor market has largely stabilized after its summer slowdown. The "doves," on the other hand, believe the labor market will continue to weaken and that the inflation spike caused by tariffs is temporary.

Upcoming data will reveal who is right — and with the government now reopened, those figures will finally be available in full.

Technical picture

On the daily chart, EUR/USD is battling for fair value around 1.1615. A successful breakout above this level could strengthen long positions initiated from the 1.1470–1.1490 area, favoring the euro against the US dollar.