Will the US dollar continue weakening against major currencies or lead the G10 race again? The US inflation report for February will give us clues. Let’s discuss it and make a trading plan for EURUSD for today.
Fundamental forecast for dollar for today
Fear sees danger everywhere. The US stock market has declined for two days, fearing an unexpected inflation boost, while the EURUSD bulls retreated without exploiting optimistic employment stats. Investors are playing it safe and closing positions as they have no idea where exactly consumer prices will be headed for. If disinflation processes continue accelerating, the Fed will be friendlier with markets than over the past few years. However, an unexpected rise in CPI will be shocking.
They think at Forex that inflation will fall at a snail’s pace. However, the White House’s updated forecasts present things differently. Economists believe consumer prices will slow to 2.9% by year-end, while yields on three- and ten-year treasuries will rise to 5.1% and 4.4%, respectively. Last year’s estimates were 3.8% and 3.6%, and a stronger economy has driven the rise.
Such forecasts suggest the Fed will try to hold rates high for a long time even if Joe Biden is ready to bet that monetary policy will be loosened soon.
The growth of the New York Fed’s consumer inflation expectations strengthens investors’ fears, too. The five-year indicator jumped to a six-month high of 2.9%, while the three-year indicator moved from January’s record low to 2.7%. Only annual inflation expectations remained at 3%.
Add to that China’s 0.7% consumer prices growth in February, and the situation starts looking alarming for risk-on assets. China has exported deflation to the global economy for a long time, and now there’s such a surge! Unsurprisingly, based on the options market, investors are more concerned about the S&P 500‘s reaction to the release of inflation data than the results of the FOMC meeting in March.
The rise in Chinese CPI is likely due to holiday consumer activity, and disinflation will return later. White House forecasts will not affect the Fed, as it’s ready to cut rates even when the economy remains strong. The moment will come soon, Jerome Powell says. Monetary expansion will likely start in June, according to 72 out of 108 Reuters experts. Seventeen respondents pointed to May, and nineteen – to July and later.
Trading plan for EURUSD for today
Experts believe the US economy will expand by 2.1% in 2024, faster than what the Fed calls an average expansion rate of 1.8%. This forecast assumes that the central bank will not rush to cut rates.
However, while the markets are taken up with the timing of the start and not the speed, CPI figures close to forecasts can provoke a new bullish attack. Thus, a breakout of resistance at 1.095 and 1.097 will be a foundation for switching from shorts to longs on the EURUSD. Conversely, stronger stats will allow us to build up short positions opened at 1.097.
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