Forex Analysis & Reviews: 23.05.2025 - The Fed Is Not Ready to Act...

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23.05.2025 12:23 AM

The Fed Is Not Ready to Act Before the Second Half of the Year

In recent reviews, I have repeatedly addressed the topic of the Federal Reserve's monetary policy, market expectations, and the reality we all live in. I believe the market's expectations for Fed easing remain excessively inflated. They were already overestimated last year when everyone anticipated a rate cut of at least 1.5–1.75% from the U.S. central bank. However, the FOMC only cut rates three times, totaling 100 basis points. At the beginning of 2025, hardly anyone refrained from predicting 2 to 4 rounds of easing, even though the last two dot-plot charts pointed to a maximum of two rounds. However, in January, Donald Trump became President of the United States, introducing a significant imbalance to the central bank's plans and discord in the U.S. economy.

After the onset of the trade war, all Fed officials, without exception, began forecasting a sharp increase in inflation. Some believe it will be short-lived, others allow for more persistent elevated inflation. One way or another, prices in the U.S. are set to rise. Avoiding this is impossible if all imported goods increase in price by even 10%. And this, lest we forget, is the minimum tariff level for Donald Trump. Such rates apply to 75 countries — excluding China, for which the import duty is 30%. It's essential to note that the 25% tariffs on imports of cars, steel, and aluminum are still in effect. As a result, prices in the U.S. are bound to rise by at least 4–5%.

Given this outlook, the Fed is reluctant to ease policy, as no one knows how high inflation might climb. Economic growth is also important to the central bank, but Trump cannot "create a recession" in just a few months. If GDP dynamics worsen rapidly, the Fed may step in. But for now, its top priority is reducing inflation to 2%.

Therefore, the most the market can realistically expect is one rate cut in 2025. Fed Governor Christopher Waller confirmed this on Thursday, stating that the FOMC will only lower rates if final import tariffs fall at the lower end of the proposed range. Translation: tariffs should not exceed 10%. Waller also believes that all trade disputes should be resolved by July. Only then will conditions for rate cuts emerge in the second half of the year.

EUR/USD Wave Outlook:

Based on the conducted analysis, EUR/USD continues to develop a bullish wave segment. In the near term, wave structure will entirely depend on the background of news related to Trump's decisions and U.S. foreign policy — a crucial factor to keep in mind. Wave 3 of the bullish trend has begun, with potential targets extending as high as the 1.25 area. Therefore, I consider long positions with targets above 1.1572, corresponding to the 423.6% Fibonacci level. It is important to remember that de-escalating the trade war could reverse the downward bullish trend. However, at this point, no wave-based signals indicate a reversal.

GBP/USD Wave Outlook:

The wave structure of GBP/USD has evolved. We are now dealing with a bullish impulse wave. Unfortunately, under Donald Trump, markets may face numerous shocks and trend reversals that defy any wave structure or technical analysis framework. The formation of upward wave 3 is ongoing, with near-term targets at 1.3541 and 1.3714. Therefore, I continue to consider buy positions, as the market shows no signs of reversing the trend.

Core Principles of My Analysis:

Wave structures should be simple and clear. Complex structures are hard to interpret and often change.
If uncertain about the market situation, it's better to stay out.
Absolute certainty about market direction is impossible. Always use protective Stop-Loss orders.
Wave analysis can and should be combined with other analysis methods and trading strategies.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.