During periods of recession, the demand for the US dollar as a safe-haven asset remains consistently high. Furthermore, the Fed will ignore the downturn to curb inflation. The greenback takes advantage. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
A recession is inevitable. The Fed will still bring inflation back to the 2% target, even at the cost of an economic downturn or even two. Former Fed chief Paul Volcker needed to deal with two recessions to press down excessively high prices in 1965-1982. All this means that the Fed should remain aggressive, and the demand for safe-haven assets will be increased, supporting EURUSD bears.
Despite the acceleration of US inflation above 9%, the bond market wants to believe that the Fed will bring it under control. A key indicator of inflation expectations, the five-year forward breakeven rate, has fallen to 2.02%, the lowest level since early 2021. If the Fed manages to return prices to the 2% target, the Fed may not need to raise the federal funds rate so aggressively. This fact could encourage the US dollar sellers.
Jerome Powell and his fellow central bankers must be decisive. The Fed doesn’t mind a recession as a price to pay for the victory over inflation. The signal of an impending downturn will not make the Fed abandon its plan to bring the federal funds rate to a neutral level.
The number of initial jobless claims is rising, and the PMI has been down below the critical level of 50, indicating an imminent contraction in GDP. By the way, Atlanta Fed’s leading indicator sends a similar signal. So don’t be surprised if US gross domestic product data for the second quarter show that the US is already in recession. So far, it is only technical. However, similar processes, when, due to the crisis in the cost of living, the population gives preference to essential goods, which presses down the industry, are taking place all over the world. That is why European PMI has collapsed to a 17-month low, and German business activity is down to a 25-month low.
When the global economy might have slipped into a recession or is about to turn down, the demand for safe havens should skyrocket, supporting the US dollar. In addition to the Fed’s aggressive monetary tightening, the EURUSD downtrend should remain strong.
Weekly EURUSD trading plan
The short-term situation is not that unambiguous. If Jerome Powell announces at a press conference following the FOMC meeting on July 26-27 that the central bank will adjust its policy depending on the incoming data, the major currency pair will rise. Otherwise, if the Fed president suggests a 100-basis-point rate hike in September, the euro will slide down to parity with the US dollar. The EURUSD could be down below 1.012 as a result of the expectations of the rate hike to 2.75%; in this case, it will be relevant to sell.