EUR/USD: Between Two Fires – Dovish Fed Signals and Trump's Trade Maneuvers

[Redator]

The EUR/USD pair finds itself at a crossroads amid conflicting fundamental signals. For the past two weeks, buyers have repeatedly attempted to settle the price in the 1.17 area, while sellers have defended the 1.15 zone. However, the pair has finished the past two Fridays near the middle of this range—levels like 1.1622 and 1.1653—essentially hovering within a broad channel, reacting only to strong news impulses without committing to a clear directional move. The cause? A contradictory flow of information—a bearish one offsets every bullish factor.

For example, last week Jerome Powell pressured the dollar with dovish rhetoric, while Donald Trump supported the greenback by announcing new trade talks with China. Although trade negotiations shouldn't technically offset the Fed's monetary easing process, the market treats them as competing narratives. Traders shift their sentiment easily—from Fed dovishness to Trump's trade optimism. Just yesterday, the dollar was the market's underdog. Now, it's suddenly a favorite again—despite the Fed maintaining its soft stance and ultra-dovish expectations continuing to grow.

Is the dollar's recent strength justified? In my opinion, no. If only because Trump has changed his posture on China several times in a single month—oscillating between escalation threats and peacemaking statements.

Additionally, real policy actions point toward ongoing trade tensions. Last week's mutual increase in port duties by both China and the U.S. remains in effect. On October 14, China imposed sanctions on several U.S. shipbuilding companies, including five subsidiaries of Hanwha Shipping.

Another sign of heightened confrontation: China broke the fragile trade truce by announcing new restrictions on the export of rare-earth minerals. If these rules take effect on December 1, companies wishing to export minerals from China will not only need government approval but also must disclose intended usage. These materials play a key role in manufacturing advanced tech, including military equipment like U.S. fighter jets. Beijing has made it clear that licenses will only be granted if the minerals are destined for civilian purposes.

With its near-monopoly on the supply of rare-earth elements, China has raised the stakes ahead of the upcoming talks. Given this strong bargaining chip, it's unlikely Beijing would accept tariff rollbacks alone as a compromise. Therefore, Trump is unlikely to conduct these negotiations easily.

In other words, the prospect of de-escalation between China and the U.S. depends not on Washington's gestures, but on Beijing's—and so far, China has not taken any visible steps in that direction, although it publicly maintains that its doors are open to dialogue.

All of this suggests that Trump will likely shift from diplomacy to aggression again soon, putting new pressure on the dollar, primarily since other fundamental factors also work against it.

As mentioned earlier, dovish market expectations continue to intensify. By the end of last week, the probability of the Fed cutting rates by 25 basis points in October rose to 100%. The odds of another cut in December increased to 94%. Traders now even assign a 6% chance of a 50-point rate cut in December and a 50/50 chance of one more rate cut in January.

This spike in dovish sentiment followed recent comments by Fed officials. Powell emphasized signs of labor market cooling and essentially previewed an upcoming rate cut. His colleagues, Christopher Waller and Stephen Miran, also voiced support for further monetary easing—Miran advocating for a 50-basis-point rate cut as early as the October meeting.

These dovish expectations could either strengthen or weaken in the coming week, depending on Friday's CPI report. The U.S. Consumer Price Index for September is expected to show an acceleration to 3.1% year-over-year (from 2.9%), while core inflation is forecast to remain steady at 3.1%. If the report meets or exceeds expectations, the odds of a December rate cut may decline—and the dollar could gain broader support. Conversely, if the data falls short, "dovish" expectations will intensify, and the greenback may resume its decline.

Over the past two weeks, EUR/USD has been trading within a wide range between 1.1550 and 1.1730 (Bollinger Bands lower boundary and the Kijun-sen line on D1). In my view, the pair is likely to remain in this corridor, reacting impulsively to new market signals. A breakout will require synchronized movement in key fundamental drivers.

For example, if Trump returns to aggressive rhetoric against China while U.S. inflation slows, buyers may attempt to push EUR/USD past the 1.1730 target. Alternatively, if China takes conciliatory steps while U.S. inflation comes in hotter than expected, sellers may pull the pair back toward the 1.15 zone.

With high uncertainty still in play, the coming week could finally tip the balance and help EUR/USD traders determine the vector of the next major price move.

The material has been provided by InstaForex Company - www.instaforex.com