Can the trajectory of three independent bodies be accurately predicted if their interactions are chaotic? Physics suggests it cannot. However, traders remain hopeful that they can chart the movements of financial assets influenced by the interplay of the economy, politics, and markets. In 2025, this task becomes even more challenging as U.S. policy under Donald Trump's return to power grows increasingly unpredictable. For now, this volatility is driving EUR/USD steadily toward parity.

The economy indicates the continuation of an era of American exceptionalism, while politics introduces greater uncertainty, and recent terrorist attacks in New Orleans and Las Vegas have shaken the markets. These factors are strengthening the U.S. dollar, both through economic divergence and its status as a safe-haven asset. Consequently, the EUR/USD has fallen below 1.04, approaching its December lows, beyond which lies a potential abyss.

The economy, politics, and financial markets all play a significant role in shaping central bank actions. These actions, in turn, influence the formation of exchange rates in the foreign exchange (Forex) market. Since U.S. dollar transactions represent approximately 90% of all currency trading, it is no surprise that investors closely monitor the Federal Reserve's decisions.

As 2024 began, markets were anticipating cuts to the federal funds rate 6 to 7 times, which suggested a substantial weakening of the dollar. However, by early 2025, this narrative changed dramatically. Now, the Fed is expected to implement only two rounds of monetary easing, with a strong likelihood of pausing rate cuts in both January and March. This shift creates a favorable outlook for those trading against the euro in the EUR/USD pair.

Fed Rate Dynamics and Expectations

Events of the past year underscored a simple truth: when forecasts fail, expect asset movements in the opposite direction. For instance, accelerating U.S. inflation in the first quarter and Donald Trump's victory in the November presidential election forced dollar skeptics to retreat. The greenback emerged as the top-performing currency on Forex among over 30 tracked by Bloomberg.

What could disrupt the downward trend of the EUR/USD exchange rate in 2025? There are a few scenarios to consider. First, a reversal in trade policies related to Donald Trump could occur. The Republican made many promises during the election campaign, but it remains uncertain whether these promises will be fulfilled. Second, the U.S. economy could experience weakness, as high interest rates may finally take their toll. Lastly, the absence of a trade war could allow both China and the Eurozone to recover. At present, these scenarios seem unlikely, and the EUR/USD continues its steady march toward parity.

From a technical standpoint, the daily EUR/USD chart shows that hopes for a reversal using patterns like the Expanding Wedge and Double Bottom are fading. If the price breaks below the support level around 1.0345, it could open the way to levels of 1.0120 and 1.0000, creating opportunities to increase short positions.