The US inflation is slowing down, as well as the GDP rate. What else is needed for the Fed to reconsider its plans? Investors are waiting for the Fed’s actions, pressing down the US dollar. Will the EURUSD be corrected up? Let us discuss the Forex outlook and make up a trading plan.
Fundamental US dollar forecast today
Markets love allegories. In 2020, investors were debating what letter the recovery from the recession would look like. Whether it should be fast and V-shaped, bumpy like a W, or the economy will never reach its previous levels, and the GDP trend would turn into an L. In 2022, there are other images. What will happen to the US economy? A soft landing, a hard one, or a series of intermediate landings? The likelihood that the US economy will plunge into a recession and the rest of the world will avoid it is extremely small, which affects the EURUSD trend.
It is now known for sure that the letter V won. At the same time, the rapid economic recovery and massive stimulus became the springboard for inflation to soar to its highest levels in four decades. If in 2021 the Fed underestimated it, for which it paid the price, then in 2022, it does not pay attention to the first signs of a slowdown in consumer prices. In May, the core PCE decreased from 4.9% to 4.7%. It is likely that the figure will drop below the Fed’s forecast of 4.3% by the end of the year. Lower demand for household goods and elimination of problems with supply chains lead to a slowdown in price growth pace. If so, what’s the point of bringing the federal funds rate up to 3.5% by the end of December?
One more reason to pause monetary tightening is an approaching recession. In May, consumer spending fell by 0.2%, which was the first time since the beginning of the year. At the same time, a downward revision of the previous four months indicates that demand was weaker than previously expected. As a result, Morgan Stanley sharply cut its forecast for US GDP for the second quarter from 2% to 0.3%. S&P Global Market Intelligence and Atlanta’s Fed leading indicator see the economy sinking by 1.5% and 1%, respectively. Given the 1.6% decline in the gross domestic product in January-March, we can talk about a technical recession.
Whether the US economy will slide into a recession or not is up to the National Bureau of Economic Research to determine. The chances for a soft landing are lowering, and the Fed may not need to hike the rates too high.
Investors expect the Fed to slow down the monetary tightening pace. The borrowing costs should rise by 75 basis points in July, but September is a different story.
EURUSD trading plan today
The US dollar is under pressure amid a drop in the Treasury yields and the lower federal funds rate at the end of 2022 and in March 2023, expected by the derivatives market. Will the EURUSD bulls take advantage? The euro’s response to the euro-area June inflation report could give a clue. If the euro is up above 1.049, one could consider purchases.
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