The Fed has made mistakes twice in the past 12 months by not reacting to market signals. The central bank continues its attack on inflation as recession anxiety grows among investors. Who is right, the policymakers or investors? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
Now it is difficult to say which of the two leading central banks of the world has chosen the right tactics. The Fed has been late twice already. First, sticking to the mantra for too long that high inflation will slow down on its own. Then changing the worldview but continuing to buy bonds. The ECB prefers to push for a gradual increase in the deposit rate, although it acknowledges that excessively high prices have become long-term. Christine Lagarde’s emphasis on gradualness rather than decisiveness sent the EURUSD down.
An efficient central bank must outperform the market. It should have more information, and if its predictions are correct time after time, investors calm down. The risks of market turmoil are reduced to zero. However, this is not about the Fed. Fed. Incorrect inflation forecasts in the second half of 2021 and a slow start to monetary tightening allowed consumer prices to accelerate above 8%. Now the markets are signaling a high chance of a recession, but the Fed ignores it. Jerome Powell’s speech before the Congress convinced that policymakers still believe in a soft landing. Allegedly, inflation should slow down without a recession that could result from the too aggressive actions of the central bank.
I believe that not all FOMC officials are sure of the need to continue the aggressive monetary tightening. According to New York, Fed President John Williams, a 50-basis-point or 75-basis-point rate hike will be discussed in June, but the final verdict will depend on the incoming data. Is a half a point rate hike really possible? The market is absolutely convinced of 75! Has the Fed abandoned the previous plan?
I suppose this is because of weak domestic data recently published. The University of Michigan consumer sentiment index has dropped to the lowest level on record. Furthermore, the Conference Board consumer confidence index has decreased to the lowest since March 2013. When both indicators fall simultaneously, the US consumer spending should also fall, as well as the GDP growth rate.
The renewed concerns about the recession after important news releases pressed down Treasury yields and weakened the US dollar, supporting the EURUSD. The euro’s drop during the European session was triggered by Christine Lagarde’s speech that had disappointed the bulls. Lagarde announced a 24-basis-point deposit rate hike in July with a possible acceleration of the monetary tightening in September; she wanted to be cautious rather than decisive. Only the acceleration of inflation expectations can change the situation, forcing the ECB to act more aggressively. Investors were disappointed and started selling off the major currency pair.
Weekly EURUSD trading plan
I suppose the euro bulls could still go ahead on the expectations of a rise in German, French, and European inflation. However, the Fed still outperforms the ECB in monetary tightening, so I recommend selling the EURUSD down to 1.048 and 1.0455.