Forecasting is not an easy matter. However, in an atypical economy, this process becomes three times more difficult. Important indicators can provide serious clues about the future trend of EURUSD.
Fundamental US dollar today
Atypical economy. Following the pandemic and subsequent economic recovery, the wars in Ukraine and the Middle East, it is difficult to understand what is happening to the US economy right now. Investors were counting on a soft landing, but a series of strong reports hint at a new takeoff. However, it would hardly surprise anyone if GDP growth eventually starts to slow down. The same thing happens with US inflation. Nobody knows where exactly it will go. Only one thing is clear — the actual numbers will seriously affect the EURUSD trend.
In theory, as the economy heats up, the Fed raises rates, and it should cool. The same is happening with inflation, which Wall Street Journal experts expect to see at 3.7% in January after 3.9% in December. The growth rate of consumer prices, according to their forecasts, will fall even more – from 3.3% to 2.9% Y-o-Y. It would be the minimum level since March 2021. The Fed’s preferred indicator, the PCE, due to the different proportions of components in the structure, risks falling even lower, which will likely force the US central bank to lower the federal funds rate at some point in 2024. When exactly? Nobody can answer the question now.
The downward trend in inflation is based on the restoration of supply chains, i.e., the end of the supply shock. However, the connection between a strong economy and high prices is still there. And the US economy is surprisingly strong. Fiscal stimulus, a significant weakening of financial conditions, productivity growth, artificial intelligence, and demographic shifts provoked GDP growth that is unusual for such an aggressive cycle of monetary restriction by the Fed. In such conditions, one should not be surprised at the acceleration of consumer prices. It will support the EURUSD bears due to lower chances of a federal rate cut in May.
This will be part of a process of revising market views on the future changes of the federal funds rate. If, at the end of 2023, investors were counting on 6-7 acts of monetary expansion over the next 12 months, now, they expect four rate cuts with little chance of a fifth. The market is close to the FOMC forecast, which limits further potential for US dollar strengthening. This will be true unless US inflation features growth.
The same goes for the US economy. Will it continue expanding? Or will the delayed effects of the Federal Reserve’s monetary tightening slow down the GDP growth rate? In the latter scenario, the EURUSD downtrend is unlikely to last long. The pair could go down to 1.05-1.055 and start to stabilize.
EURUSD trading plan today
The US inflation January report is essential for predicting further actions by the Fed and the price direction of the US dollar in an atypical economy. Figures close to forecasts or slightly below them will point to the consolidation of EURUSD with a good chance of a rebound in the direction of 1.082 and 1.088. On the contrary, the unexpected acceleration in consumer prices will suggest selling the pair with targets at 1.063 and 1.055.
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