Oil shocks often lead to recessions. In this regard, the surge in the oil prices brings the global economy closer to a recession, encouraging the EURUSD bears. Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
Are investors ready for a recession? For now, they are treating the impact of the oil shock on inflation as temporary and making the same mistake as the Fed did in 2021. Last year, Jerome Powell and his colleagues also considered the consumer price surge transitory and paid dearly for that. US inflation could jump to 10% and then slow down to 7.5% by the end of 2022, and the Fed will have to aggressively tighten monetary policy. If the monetary tightening is too fast, there could be an economic downturn. In such an environment, the US dollar usually strengthens.
History shows that when the price of oil doubled in a short amount of time, something terrible happened. Sometimes it was a recession, like in 1974, 1980, or 2001. Sometimes the world economy was on the verge of recession, like in 1990 or 2008. At present, inflation is high and the Fed will spare no effort to curb it, so the risk of a recession becomes real. In 1973-1974, stocks fell 43% in 12 months, and in 1981, after the Fed raised rates to 19%, they also fell into bear territory. Equities are currently overvalued, which is bad news. The good news is that the USA is energy independent.
The USA imposes a ban on Russia’s oil imports and, in theory, it doesn’t have to worry about Moscow’s threats that if other countries join it, Brent will rise to $300 per barrel. In theory. In fact, according to Jerome Powell, an increase in oil prices from $75 to $110 per barrel will add 0.9 percentage points to inflation and subtract 0.5 percentage points from GDP growth. Furthermore, will the USA be able to withstand a deep recession in the euro area and emerging markets? The economic ties between the largest economies of the world are so close that the problems in the euro area will influence the US economy as well.
Concerns about recession and stagflation change the ECB outlook and the expectations of the financial markets. The war in Ukraine has changed the economic landscape. The European Central Bank was previously expected to schedule an exit from quantitative easing programs in March, now, it will have to maintain the monetary stimulus. The derivatives market hardly believes that the ECB will raise the rates in 2022.
Weekly EURUSD trading plan
Thus, the high risks of stagflation in the euro area and the growing likelihood of a recession in the US suggest that the euro downtrend is strong. The longer the war in Ukraine lasts, the higher the chances of parity. In this regard, Volodymyr Zelensky’s statement that Kyiv no longer insists on NATO membership was taken as a sign of a de-escalation of the conflict, and the euro increased to 1.09. It is still relevant to sell the EURUSD at 1.0955, 1.1, and 1.105.