Obviously, the markets ran ahead, expecting the fed funds rate to drop from 5.5% to 4% in 2024. The revaluation of all values made the EURUSD pull back at the beginning of January. What’s next? Let’s discuss it and make a trading plan.
Weekly fundamental forecast for dollar
How you meet New Year is how you will live it. That’s true of US stocks. S&P 500 lost nearly 2.1% in value on average and closed in the red zone in 58% of cases after failing to start a year successfully. Conversely, a good start allowed the broad index to grow 9.2% over a year in 78% of cases. That’s also true of the US dollar, whose successful start of 2024 made investors doubt its year-end weakness.
The main factor in the greenback’s consolidation is that investors reviewed their expectations of the Fed’s policy easing. The odds of a fed funds rate cut fell from 88% to 77%, allowing the EURUSD quotes to slide. Investors are closing longs in the main currency pair ahead of important US jobs data. The Fed’s policy is data-dependent, and the labor market’s condition will allow us to figure out the general direction of the US economy.
The market activity went overboard at the end of 2023. Investors believed the Fed would cut rates by 150 basis points in 2024 and start a new expansion cycle as early as March. At the same time, most big banks don’t expect policy tightening before June. Barclays, HSBC, and LH Meyer agree with the FOMC’s forecast of a 75 basis points cut in borrowing costs. Citigroup, Bank of America, Nomura, and Morgan Stanley’s estimation is 100 basis points.
The market greed was based on believing in a soft landing, which may not happen, Richmond Fed President Thomas Barkin says. Too strong demand amid a recent decline in long-term rates may accelerate inflation, so higher borrowing costs should not be excluded.
Investors were also confused by the FOMC’s December minutes. Although some officials suggested that the monetary restriction cycle was over, they did not discuss rate cuts. Some politicians noted that in the current circumstances, rates could remain at higher levels for longer than expected. According to Nomura, the Fed’s lack of confidence in defeating inflation does not correspond to the early and rapid pace of cuts the market counts on.
Market expectations are being revalued, which leads to a bearish pullback of the EURUSD. Still, I wouldn’t assert that a bearish trend is reviving. The acceleration of European inflation from 2.4% to 3% in December will question aggressive investor forecasts of the ECB’s deposit rate cut by 150 basis points in 2024 and support the euro.
Weekly trading plan for EURUSD
According to JP Morgan, we may be pleasantly surprised by the eurozone’s economy, where excess savings have grown from 11% to 14% in two years. As divergence in monetary policy with the US becomes smaller, we can have a weighty reason to buy the EURUSD. Still, don’t hustle too much until the US jobs data for December are released. Just hold your shorts opened at 1.1095 and 1.1055.
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