Due to the risks of hawkish surprises from the ECB and expectations of weak US jobs report, the EURUSD rally is coming to its climax. The most important events of the week are to come. How will the euro-dollar react? Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
The inflation cat is out of the bag; and arguably, the Fed opened the bag on purpose. The Fed spurred inflation growth by its average inflation targeting policy and huge monetary stimulus. High inflation is now a global problem, which makes other central banks tighten monetary policy. The record rise of the euro-area PCI adds problems to the ECB.
Consumer prices in the euro area in January accelerated from 5% to 5.1%, exceeding the historical high. Bloomberg had expected inflation to slow to 4.4% based on the base effect of the German tax cut. In July 2020, the German government lowered VAT rates for 6 months. As a result, starting from July 2021, prices were artificially high, and they should have decreased in January. The reality turned out to be different.
The acceleration of European inflation allowed derivatives markets to signal an increase in the deposit rate by 30 basis points in 2022. At the same time, investors expect the first rate hike in July. This contradicts both the opinion of Bloomberg experts, who predict that this will happen only in the second half of 2023, and the position of the ECB.
Christine Lagarde can certainly refer to the fact that core inflation and wages in the euro area are not rising as fast as in the US or the UK, but any hint that the current high inflation will remain longer than expected could become a hawkish surprise encouraging the EURUSD bulls. The ECB played itself into a corner, repeating the mantra about hump-shaped CPI dynamics. If the indicator draws a plateau, the central bank will have to look for ways to get out of this corner.
The risks of the ECB hawkish tone, the four-day rally of the US stock indexes, the fastest since November 2020, and investors’ concerns about a weak report on the US employment have been the primary drivers of the EURUSD in the week ending February 4. if the ECB, contrary to its words, decides to normalize monetary policy in 2022, and five rate hikes have been already priced in the US dollar quotes, the euro downtrend may not continue. A significant rise in the USD index in 2022 requires that market expectations of the future value of the federal funds rate jump by another 62 basis points, according to 24 Reuters experts.
Weekly EURUSD trading plan today
The greenback is under pressure because the change in the US nonfarm payrolls could be negative in January. Bloomberg experts’ forecasts range from -400,000 to +250,000, and the decline of 300,000 in ADP private sector report encouraged traders to sell the US dollar. The EURUSD has tested an important level of 1.132, and traders are waiting for the US jobs report and the news from the ECB. Only if the euro goes down below $1.127, the bears could count in the downtrend restoration.