How long will the EURUSD correction last? Despite the uptrend’s strength, no one wants to buy falling assets. Should we wait for the correction to slow down? What is it based on? Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
Inflation and recession continue to dominate the financial markets, but in mid-spring, many began to view them from a different angle. How long will the Fed and other central banks tolerate high inflation? Are they ready to accept the recession? The answers to these questions determine the trajectory of the federal funds rate. Everyone monitors this indicator, including stock indices, treasury bonds, and the US dollar.
Nearly two-thirds of fixed-income investors surveyed by Bank of America believe the Fed will accept a 2-3% price rise if it prevents a recession. Only 42% of respondents in January believed the central bank would do such a thing. A fifth of investors even expect the Fed to agree to inflation at 3-4%. This means that Jerome Powell and his colleagues will not increase the borrowing cost and possibly even reduce it if the recession hits the US economy and the PCE continues to exceed the 2% target. Such market conditions will lead to a EURUSD rally.
However, there is an opinion that the the central bank will not loosen monetary policy in response to the recession until inflation falls to 2%. This position of investors led to an increase in the expected federal funds rate by the end of the year from 3.75% to 4.5%, which formed the basis for the EURUSD correction.
In other words, the derivatives market previously predicted a decrease in borrowing cost from its peak of 5.25% by 150 bps. Now the forecast has dropped to 75 bps. If this figure falls to zero, according to the latest FOMC estimate, the US dollar should further strengthen.
Hedge funds, which exited USD short trades against major world currencies in the week ended by April 11, began to bet on this. Their strategy works out as EURUSD is declining.
Fortunately for euro buyers, the EURUSD dynamics depend not only on the federal funds rate. Chinese data and US stock indices strengthen EURUSD bulls. American indexes have risen in 5 of the last 6 cases when the Fed has completed a monetary restriction. Growth has averaged 19% over the next 12 months since borrowing costs hit their high.
Weekly EURUSD trading plan
China’s economy expanded by 4.5% in the first quarter, surpassing Bloomberg’s forecast of 4%. The economy will continue to grow in the future. This is good news for the export-oriented eurozone and its currency. Divergences in economic growth and monetary policy strengthen the EURUSD, suggesting that the uptrend continues. Even if the bears break out the support at $1.09-1.091, a price rebound from $1.0835, $1.08, and $1.0765 will allow buying the euro at an attractive price.