If the US economy is strong, one should expect two federal funds rate hikes. If inflation does not return to the target before 2025, the borrowing cost will be at its peak for a very long time. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
Central banks are faced with an unexpected challenge — the amazing strength of their own economies. Despite aggressive monetary tightening, higher-than-expected GDP growth, a strong labor market, and persistently high inflation are taking place. For these reasons, most FOMC members predict two federal funds rate hikes in 2023. Jerome Powell expressed this opinion at a meeting of bankers in Sintra, Portugal. That is why the EURUSD has been down.
Due to the rapidly rising interest rates, the central bank has not had enough time to see the consequences of these moves, the Fed chairman said. That is why the regulator needs a pause. Will the rates go up in the one-session mode? It’s possible but not necessary. The stability of the economy is related to the fact that monetary policy has not been restrictive for a long time. Now it may not be restrictive enough. This wording is a clear allusion to the continuation of the monetary tightening cycle.
Equally important is Jerome Powell’s forecast that core inflation will not return to the 2% target before 2025. He assumes that the federal funds rate will remain elevated for longer than markets currently expect. This is an important bullish driver for the US dollar.
Following strong reports on new home sales, durable goods orders, consumer spending, and a speech by the Fed chairman in Sintra, derivatives raised the chances of the federal funds rate rising to 5.75% or more by the end of 2022 from 10% to 25%. The market begins to understand its mistake and correct it. The campaign against the Fed will not end well. If the FOMC predicts two acts of monetary restriction this year, then only new data on the economy, and not the desire of investors, can change the opinion of the Committee.
Another important point is that the timing of the dovish shift has been shifted to May 2024, although a month ago, investors believed it should occur in December.
The US dollar will be popular as long as inflation remains stable and the labor market shows no signs of cooling. Under such conditions, Fed pauses do not weaken the greenback. On the contrary, the pauses set expectations for higher rates in the future. As a result, the EURUSD bears’ failures are temporary, and investors have an opportunity to sell the pair at beneficial prices.
Weekly EURUSD trading plan
Although the ECB sounds hawkish, it has few opportunities in reality. The euro-area economy performs worse than the US due to the effects of the war in Ukraine and the energy crisis, as well as the pain of the Fed’s rate hike. Of course, inflation can be defeated by plunging the currency bloc into recession, but will this be good for the euro? It is relevant to add up to the shorts entered at 1.0965 with targets at 1.0835 and 1.08.
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