Just like investors look for patterns to make money, central banks refer to past experience to wisely adjust monetary policies. Fed hopes to avert recession. Will the plan of 1994 work out? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
When the incoming data are mixed, it is difficult to make the right decision. Investors fear that the armed conflict in Ukraine and the Fed’s aggressive monetary tightening will lead to a global recession, but they are willing to buy stocks in the hope that everything will end well. Peace will come to Eastern Europe, and the US economy will be able to avoid recession. In such conditions, the market reacts to the news very slowly, and the prices for assets, including the EURUSD, are jumping up and down.
Investors still can’t come to a conclusion on how to interpret Jerome Powell’s speech. First, they focused on the idea of the Fed’s willingness to raise the interest rate by half a point at the next few FOMC meetings, contributing to the US dollar strengthening. Next, some optimists noticed Powell’s words that the recession could be avoided and his examples of the central bank’s successful actions in 1965, 1984, and 1994. A day later, the sellers of the S&P 500 and EURUSD went ahead. If the Fed wants to use the plan that worked out almost 30 years ago, it will have to tighten monetary policy really fast, which could result in a recession.
In 1994, the Fed doubled rates from 3% to 6% at 7 FOMC meetings, which included two hikes of 50 basis points and one of 75 basis points. The problem is that then the labour market was not as tough as it is now, not to mention the amount of monetary stimulus. The current cycle of monetary tightening begins with historically low real Treasury yields. At the same time, the theory says that monetary tightening leads to an increase in unemployment and discourages employees from demanding higher wages. Currently, this pattern may not work.
As a result, what was avoided almost three decades ago can happen now in 2022. I mean an economic recession, which is usually signalled by the inverted yield curve.
The Fed intends to act aggressively, even Mary Daly, a traditional dove, sounds hawkish. Federal Reserve Bank of San Francisco President Mary Daly said if the Fed needs a 50 basis-point interest-rate hike, it will do it.
In the euro area, on the contrary, the situation looks fame worse. Russia’s intention to transfer payment for gas from euros to rubles led to a sharp increase in gas prices by 19%, followed by a rollback in oil prices by 5%. The energy crisis continues in the euro area deteriorates, resulting in a decline in consumer confidence to its lowest levels since the start of the pandemic. This, in turn, increases the risks of a recession.
Weekly EURUSD trading plan
The EURUSD bears are encouraged by the Fed’s willingness to raise the federal funds rate by 50 basis points in May, and possibly in June, as well as rising energy prices in Europe. However, most of the bullish factors for the USD have already been priced in the quotes. Furthermore, investors are greedy to buy US stocks. So, I suggest a possibility of the euro-dollar consolidation in the range of 1.089 – 1.116.
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