Markets believed in a 100-basis-point rate hike in July; next investors thought a 75-basis-point hike is a big move. The EURUSD is jumping up and down amid changing expectations. Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
The euro prospects look gloomy. The EURUSD hit a 20-year high and the situation looks terrible. Russia isto turn off gas permanently off gas, Italy is about to plunge into political chaos, and the ECB’s monetary tightening cycle due to a looming recession will be both short and shallow. However, many negative factors have already been priced in the euro quotes, as well as the positive ones in the US dollar price. Will there be a correction up?
Investors are focused on the announcements of the Fed’s officials. The problem is that there are too many talks. After the publication of the US inflation data, several FOMC officials suggested a 100-basis-point rate hike in July, the derivatives market increased the chance of such an outcome by 90%. At the end of last week, the chance was down to 30%, as the University of Michigan’s survey showed that consumers expect inflation to run at the lowest level since the beginning of the war in Ukraine, and the Fed’s policymakers didn’t sound that aggressive. The US stock indexes have been up and the greenback has been down.
According to Atlanta Fed President Raphael Bostic, “Moving too dramatically will undermine a lot of the other things working well.” Federal Reserve Bank of Kansas City President Esther George believes that the economy and markets may not adjust to an excessively fast monetary restriction. Christopher Waller suggests there is no use in raising the borrowing costs by 100 basis points when inflation expectations are declining and the commodity prices are down. It is a hard task to tighten the monetary policy at a correct pace. 46% of Wall Street Journal experts believe the Fed will raise rates excessively and cause unnecessary economic weakness. 42% of respondents predict that the central bank will do everything right, and the remaining 12% think the monetary tightening will stop too early.
Although experts polled by the Wall Street Journal increased the likelihood of a recession in the United States over the next 12 months from 44% to 49%, the latest data signal that the recession is still far away. In particular, retail sales rose by 1% M-o-M in June, which against the backdrop of a strong labour market, indicates consumers are strong, and the economy is stable.
In Europe, the likelihood of a recession is much higher. Bloomberg experts give a 55% chance for a downturn in Germany. Only 16% of the 792 investors polled by Pulse believe that the euro-area economy will avoid a recession. This circumstance, coupled with the growing chance of Mario Draghi’s resignation and early elections in Italy, holds the ECB back and presses down the euro. 69% of investors believe that EURUSD would rather fall to 0.9 than rise to 1.1.