Positive corporate reporting has been a stronger driver for the EURUSD than the Fed’s reluctance to cut the rates in March. However, the future trend of the pair will depend on the US jobs report. Let us discuss the Forex outlook and make up a trading plan.
Fundamental US dollar forecast today
What is more important for EURUSD, the Fed’s reluctance to raise the federal funds rate in March or Meta Platforms’ intention to pay dividends? Greed once again prevailed over Fear in the financial markets, and positive corporate reporting from three of the Great Seven companies quickly returned the S&P 500 to growth, allowing the euro to bounce from the levels of $1.079-$1.08 and soar a hundred pips.
One of the paradoxes of January was the simultaneous rally of the broad stock index and the US dollar. It was made possible by the extraordinary strength of the US economy. But with jobless claims rising to their highest levels since mid-November and ISM manufacturing activity falling below the critical level of 50 for the 15th month in a row, it’s a sign of weakness. Treasury yields fall, the S&P 500 recovers from its worst day since September, and EURUSD proves it is not scared of Jerome Powell.
The Fed Chair’s willingness to play for time by stating that March is not the base scenario for the start of monetary expansion is understandable. If the central bank starts cutting rates too early, inflation could rise. Going too late is fraught with increased unemployment. The situation is aggravated by the year of presidential elections. Republicans accuse the Federal Reserve of intending to support the current government by easing monetary policy. Democrats are perplexed why Jerome Powell doesn’t cut the rates as inflation plummets.
Meanwhile, the euro is supported first by a smaller slowdown in euro-area consumer prices than expected and then by the Bank of England. In January, European CPI fell to 2.8%, core inflation to 3.3%, and services inflation anchored at 4%. Pantheon Macroeconomics said these were not the numbers that would force the ECB to cut deposit rates in March and moved its forecast to April.
Capital Economics noted that the persistence of service inflation is causing the European Central Bank to be cautious.
Two votes for raising the BoE rate seemed to be a hawkish signal to investors, which supported both the pound and the euro as pro-cyclical currencies. If the Bank of England can afford to take its time easing monetary policy, why shouldn’t the ECB do the same?
So, the Fed and other central banks are stuck between watching inflation fall and fearing it might rise again. At the same time, the rally in US stock indices against the backdrop of positive corporate reporting has put pressure on the greenback as a safe-haven asset.
EURUSD trading plan today
The US dollar could still recover if the US jobs report is strong, signaling the US’s economic strength. If so, the EURUSD will go back to the range of 1.08-1.085. Otherwise, weaker-than-expected employment data will increase the chance of the Fed’s rate cut in March, sending the euro above $1.09.
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