Time flies. Jerome Powell says the Fed can’t afford to tighten monetary policy gradually. The central bank must act decisively. How will this affect the EURUSD? Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
The Fed is still one step ahead. While Christine Lagarde says there will be no return to the previous low inflation mode, Jerome Powell talks about the adjustment of the US central bank to the new environment. While the ECB is about to start raising rates from 25 basis points, the Fed can’t afford to tighten monetary policy gradually. The clock is ticking. Inflationary expectations are steadily high. The Fed’s job is to fight inflation, and it will go ahead. If the US regulator is ahead of its European peers, then the EURUSD bears have a benefit. And they are going ahead.
The speeches of central bankers in Sintra prove that they are willing to tighten monetary policies aggressively, as suggested by the Bank for International Settlements. Jerome Powell said he is more concerned about the inability to curb inflation than about the risks of too aggressive rate hikes. Christine Lagarde noted that the economic situation in the euro area is different from that in the USA, as the war in Ukraine presses the European economy down. At the same time, rising energy and food prices increase the risks of higher inflation expectations and may require the ECB to tighten monetary policy more aggressively.
While the European central bank debates whether it should be more aggressive or not, German inflation suggests another puzzle. Instead of rising in June from 8.6% to 8.7%, as Bloomberg experts expected, it unexpectedly slowed down to 8.2%. Tax cuts on fuel and transport discounts are cited as the main reasons. ING notes that the final figures prove that governments, not central banks, can now cut prices.
Of course, inflation in Germany can still accelerate because the measures used by the government are temporary. However, the June data make the most likely outcome of the ECB meeting in July to be a 25-basis-point increase in the deposit rate. The Governor of the National Bank of Belgium, Pierre Wunsch, called such an outcome of the upcoming meeting a settled matter. However, the central bankers from Latvia, Lithuania, and Austria would rather start with a bigger step.
The Fed’s monetary restriction looks much more aggressive. Cleveland Fed President Loretta Mester says that if the FOMC met today, she would not hesitate to vote for a 75-basis-point increase in the federal funds rate. In her opinion, the increase in borrowing costs to 3.5% is really important in the fight against inflation.
Weekly EURUSD trading plan
Of course, such an aggressive Fed monetary tightening will affect the US economy. In the first quarter, US GDP sank 1.6%, and according to forecasts by HIS Markit and Atlanta Fed’s leading indicator, in the second quarter, the GDP will show a slow growth of 0.1% and 0.3%, respectively. However, given the high likelihood of a Russian gas cutoff, recession risks in the euro area are even higher. This means the ECB could make a pause in monetary tightening. It is still relevant to sell EURUSD towards 1.037 on corrections.
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