Dollar feels free. Forecast as of 11.07.2022

The US economy is far from recession, judging by the jobs report. The Fed is to continue raising the rates. How will this affect the EURUSD? Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

The US jobs report for June has convinced investors that the US economy will not slide into a recession. There won’t be any production cuts if the US employment adds 372,000 new jobs per month. This is how employment grew at the beginning of the summer, which roughly corresponds to an average monthly increase of 400,000 new jobs in the spring. The labour market is cooling after a peak, but it is far from a downturn. The US economy looks strong. If so, EURUSD bears should go ahead.

Strong domestic data suggest the Fed should raise the interest rate by 75 basis points in July and then push it up to 3.5% by the end of the year. The current Fed doesn’t want to repeat the mistakes of its predecessors, which in the 1970s used the “stop-go” tactics. They waited for high inflation, increased borrowing costs, and then stopped again, looking for alarms from the economy. As a result, they had to run, not go, and aggressive monetary restrictions led to unemployment rising above 10% in 1980-1982.

Now, unemployment could rise to 5.5%, which will be normal. This is where the indicator should be if the labour force participation rate returns to its pre-pandemic levels. The Fed needs a slowdown in employment and average wages, which will indicate a contraction in domestic demand and eventually press down inflation.

The Fed feels free while the ECB’s capacities are limited. Investors were concerned about the announcement of the Governor of Australia’s central bank Robert Holzmann that the Governing Council should raise the deposit rate by 125 basis points at the next two meetings, including +50bps in July and +75bps in September. It means the ECB should take decisive steps now.

However, the euro-area economy is facing an upcoming recession even without monetary tightening. Due to the proximity to the armed conflict in Ukraine, dependence on the Russian oil and gas supplies, and the energy crisis made Bloomberg’s experts increase the chances of the economic downturn in the next 12 months from 30% to 40% for the currency bloc and from 30% to 55% for Germany.

If the Fed makes a soft landing for the US economy and the ECB plunges the European economy even deeper into the recession, the EURUSD will drop below parity. No one knows how deep the pair will fall. According to Deutsche Bank, the euro drop to $0.95-$0.97 will correspond to the extreme historical levels of exchange rates since the collapse of Bretton Woods.

Weekly EURUSD trading plan

Although the EURUSD seems stable in response to the US strong jobs report, it could continue falling. If the price rebounds down from resistances at 1.022 and 1.024 or breaks out the support at 1.12, one could consider entering short trades.

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