A strong US jobs report hasn’t discouraged the Fed from its plan to cut the rates to 4.75% в 2024. The FOMC members are focusing on a slowdown in inflation. Will it support the EURUSD upward correction? Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
It’s correction time in Forex. Declining US Treasury yields amid a strong auction for the sale of three-year securities, neutral rhetoric of the FOMC officials, surprising after a strong US jobs report, and still bearish forecasts by Reuters greenback experts allowed EURUSD to bounce off the bottom at the first of two targets at 1.073 and 1.064 for previously recommended shorts. Is it profitable to sell euros at a higher price?
Minneapolis Fed President Neel Kashkari emphasized progress in the battle against high inflation. Cleveland Fed president Loretta Mester acknowledged the strength of the US jobs market but said that for the rest of the year, employment growth will decline, average wages will slow, and unemployment will rise. This will encourage the Fed to cut the federal funds rate three times. If previously markets ignored the incoming data, is the Federal Reserve doing the same now?
In fact, even after the strong US jobs report for January, the discrepancy between investor views and FOMC forecasts remains wide, creating room for major market swings. Traders in futures markets are betting on a range of possible outcomes, with the Fed’s estimates looking more accurate.
At the beginning of the year, investors wanted to force the Federal Reserve to take the path of a faster monetary easing than outlined in the FOMC December forecasts. The market wanted a stimulus from the central bank, but this does not mean the stimulus will be issued. A series of strong US domestic reports allowed the Fed to maintain its position of gradually easing monetary policy. The data was not weak enough to put pressure on Jerome Powell and his fellow central bankers. As a result, EURUSD slipped down a three-month low.
The EURUSD drawdown does not prevent Reuters experts from predicting its growth in the medium term. While 80% of 67 specialists said the main risk to their half-year forecast is that the US dollar will be stronger than expected, they believe EURUSD will rise to 1.12 in 12 months.
BNP Paribas shares the same opinion, predicting the further development of disinflationary processes, which will lead to five rate cuts by the Fed starting in May. This is a more aggressive monetary expansion than reflected in the December FOMC forecasts and CME derivatives readings. The company notes that a further slowdown in US inflation will lead to an increase in real Treasury yields. And the Fed’s stance will become even more hawkish, increasing the risks of a recession.
Weekly EURUSD trading plan
After all, the EURUSD forecast for six and twelve months depends on the future economic data. As of now, markets speculate about US exclusivity and wonder if the US economy will have a soft landing or a new growth streak. It doesn’t seem wise to sell the US dollar now. I recommend entering euro shorts when the price rebound from resistance at $1.078 and $1.081.
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