The idea of divergence in monetary policy and economic growth is losing weight. The EURUSD didn’t react to the US strong domestic data. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
When strong domestic data do not strengthen the local currency, the market is tired of old ideas. US employment has been up by 400000 or more for eleven consecutive months, which is a record high since the records began in 1939. The unemployment rate has been down to 3.6% in March, close to a 50-year low. The US labour market is overheated, inflation has climbed to the top in the last four decades, and the Fed will be forced to tighten monetary policy aggressively. However, the EURUSD isn’t falling, and investors seem to have lost interest in the old ideas. If the price isn’t going where it should, it must be going in the opposite direction.
When the armed conflict in Ukraine began in late February, some analysts suggested the euro could reach parity with the US dollar. Allegedly, the euro area economy would face a recession, as the region is not far from the epicentre of the conflict, and it depends on Russian oil and gas. Furthermore, the divergence in the monetary policy of the Fed and the ECB and the strong demand for the greenback as a safe-haven asset should have drawn an utterly bearish picture for the EURUSD. It should be noted that some banks still stick to the idea of the continuous euro downtrend against the dollar. For example, Bank of America still sees the euro at $1.05.
I suppose the euro stability versus the dollar now means that most of the positive factors for the US dollar have been already priced in the pair quotes while the euro is obviously oversold. Negotiations between Moscow and Kyiv reduce the demand for safe-haven currencies, and the Fed’s aggressively hawkish comments do not send the EURUSD down. The pair doesn’t fall amid extreme values of the spread between two-year US-Germany bond yields and five-year swaps, suggesting that the Fed is expected to raise the rate too high. Conversely, markets underestimate the ECB’s potential monetary policy changes.
The president of the Dutch central bank, Klaas Knot, says the ECB should quit the QE programmes before the end of the third quarter to raise the rates in the fourth quarter.
History also suggests the euro should strengthen. Over the past 40 years, when the Fed and other central banks were raising interest rates, the S&P 500 lagged 0.44 % per month behind the average of foreign indexes, according to the Wall Street Journal. Most likely, this happened because the foreign investors withdrew their funds from the US and returned the money to their countries since the tightening of monetary policy, as a rule, indicates a strong economy. No one knows when the money will be returned to Europe, but it definitely will.
Weekly EURUSD trading plan
If the EURUSD bears do not break out the support at 1.1035 – 1.1055, it will be the first sign of their weakness, and one could consider exiting the shorts entered earlier.
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