Theory without practice is dead. When the Fed began its most aggressive rate hike cycle in four decades in 2022, the market was saying that a recession could not be avoided. However, in fact, the US economy is in a state of soft landing. The introduction of draconian tariffs by the White House in 2025 was supposed to accelerate inflation on paper. In fact, consumer prices slowed to 2.4% in January. Maybe Donald Trump’s ideas are not as crazy as they look from textbooks on economic theory?
Inflation in the United States risks returning to the 2% target without a recession, which not so long ago seemed like something impossible. According to economists, a significant increase in unemployment was required for the disinflationary trend to continue. But the labor market has stabilized, and consumer prices are falling.
When oxygen masks are not needed, it is not the time to unbuckle your seat belts. The Fed is unlikely to ease monetary policy, looking at the progress of the CPI. For the central bank, another indicator is more important – the personal consumption expenditure index or PCE. And it is still much closer to 3% than to 2%.
Nevertheless, if the soft landing continues to take place, the economy grows above trend, employment increases above 50 thousand per month, and inflation moves towards the target, such high rates will not be needed. The futures market is confident of their decline before July and estimates the scale of monetary expansion at 60 bps in 2026. We are talking about two acts with a 40% chance of a third.
In such circumstances, even if the US dollar struggles in the short term, its prospects look unambiguously “bearish” over the medium and long-term investment horizon. Especially if the American economy continues to slow down, while the European economy’s growth rate, on the contrary, increases. The reduction in divergence allows Capital Group to forecast an increase in the ECB deposit rate by the end of the year and a return of EURUSD above 1.2.
In this regard, the third week of February can provide important clues. According to Bloomberg experts, disappointing retail sales statistics triggered a slowdown in US GDP in the fourth quarter from 4.4% to 3%. On the contrary, the leading indicators for the eurozone economy are business activity indicators that may continue to grow.
In this changing world, which has become insane since Donald Trump’s return to power, you can’t be sure of anything. However, it makes no sense to completely abandon the principles of fundamental analysis that have been working for decades.
