Dollar is to look back. Forecast as of 24.02.2023

Investors have been focused on the US economic news trying to project how the Fed will act. However, other world economies also matter. It’s time to pay attention to the news from Europe and Asia. Let’s discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

When do trends break? When the majority is sure that they will continue. The market is becoming increasingly convinced that the February rally in the US dollar will gain momentum, as last year’s advantages are returning to the greenback. The US economy is going for another boom, the federal funds rate is about to reach 6%, and Treasury yields are rallying while stocks are falling. These were the USD bullish drivers in 2022, when the greenback hit a 20-year high. Will the US dollar reach its all-time high?

In fact, there is life outside of America. Lately, investors have become obsessed with US domestic data, speeches by FOMC officials, and the increased likelihood of a 50-basis-point increase in the federal funds rate at the Fed’s March meeting from 13% to 27%. They ignore developments elsewhere, including the ECB’s willingness to raise borrowing costs to 3.75%, the highest since 2001 when the central bank spared no effort to build confidence in the new European currency. Or the intention of the Bank of Japan to abandon the yield curve control policy after a new leader comes to power. But it can’t go on like this indefinitely!

As soon as all the positive factors are priced in the dollar quotes, investors will turn their attention to events in other parts of the world. And the wait doesn’t seem to be long. At the end of the Fed’s monetary policy tightening cycle, there are 3-4 rate hikes left, not 10, which is more of a bullish factor for EURUSD than vice versa. Morgan Stanley Investment Management believes that the central bank will be able to bring inflation down to 3% relatively easily, but will not raise the federal funds rate to 6% to push prices lower.

There are always two currencies in any pair. One should also look at competitors, and not just at the greenback. The fact that other economies are catching up with the US one, and other central banks are catching up with the Fed, cannot but affect the trends of dollar pairs. It’s one thing when the US economy is strong, and the currency bloc is weakened because of the energy crisis. It’s another matter when the euro-area economy is getting stronger, and China’s recovery supports the expansion of the GDP of the export-led European economy.

Furthermore, amid the acceleration of European core inflation to a historical peak of 5.3%, the ECB could raise the deposit rate by 50 basis points at the next meetings.

Weekly EURUSD trading plan

The market needs news. As soon as one source of news is exhausted, investors search for others. They could well pay their attention to Europe a bit later. After all, I don’t think the situation will radically change until the US jobs report for February. Everyone is now wondering if the January surge in the US economy was a temporary phenomenon. Reports on US unemployment and inflation will help answer this question. Until then, EURUSD could be consolidating. It makes sense to use the rebound from the supports at 1.056 and 1.051 to move from shorts entered below 1.07 to longs.

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