In the first half of 2021, the Fed was more than patient. But everything has been different starting from the summer. At the turn of autumn and winter, the Fed became a total hawk. How does this affect EURUSD? Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
History repeats itself but doesn’t always rhyme. Unlike in 2008-2009, when the recession lasted longer, and the Fed was slowly abandoning monetary stimulus, now is a completely different story. The recession ended quickly, the economic recovery was robust, and inflation jumped to its highest levels in several decades. Unsurprisingly, the Fed sees the exit from QE and the rate hike quite differently than its predecessors. And this circumstance encourages the EURUSD bears.
When the FOMC officials decided in November to wind down its $ 120-billion quantitative easing programme within eight months, they understood that a faster cut in asset purchases could scare financial markets. The central bank has taught investors such words as “patience,” “slowly,” “we do not think about raising rates.” If the Fed had said that QE would become history in March, stock indexes could have easily collapsed. Following strong data on October employment and inflation, the quicker tapering of monetary stimulus is a necessary measure. Yes, the labour market looked a little worse in November, but the Fed has focused on controlling prices, making two or three federal funds rate hikes in 2022 quite likely.
Investors love divergences. In the economic growth, in monetary policies, in words, after all. Jerome Powell has abandoned the mantra about the transitory nature of high inflation, which means a lot. Christine Lagarde continues to stick to it, compares the current surge in CPI to a hump, and truly believes in the passing nature of high prices. Furthermore, the IMF notes that the ECB should take into account temporary inflationary pressures and maintain an optional monetary policy, which sets back the EURUSD bulls.
The Fed is getting more aggressive while the ECB remains passive. Everything is clear for 2021, and investors wonder what will happen in 2022. Christine Lagarde claims the ECB will hardly raise the interest rates next year. Conversely, the FOMC updated forecasts will surely show that most Committee members expect more than one rate hike in 2022. Divergence in monetary policies will press the EURUSD down, and nobody will take seriously the speeches like the one by the head of the Central Bank of Austria, Robert Holtzman, who said it might be appropriate to raise the rates before the QE completion.
Weekly EURUSD trading plan
The Forex stays calm, which is natural in the short term. Investors are preparing for an extremely busy week when the Fed will announce its decision on December 15 and the ECB and the Bank of England on December 16. In such conditions, even if the EURUSD breaks out the trading range of 1.127-1.135, it may not result in the downtrend resumption or an upward correction. I suppose that the consolidation range will widen. Therefore, traders should set moderate targets.
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