During the first half of 2021, the Fed seemed to be dozing, calling the markets to be patient. In the second half of last year, the Fed was slowly waking up. In 2022, everything has changed. How will the actions of the US central bank affect the EURUSD? Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
Bullard killed the US stock market. St. Louis Federal Reserve President announced his willingness to vote for a half a point rate hike in March; he added that the Fed’s monetary tightening might occur at the FOMC extraordinary meeting. Furthermore, geopolitical risks in Eastern Europe are rising, and the US consumer sentiment has hit a more than 10-year low. The S&P 500 has marked its fourth losing close over the past six weeks. If the Fed’s monetary tightening can’t support the greenback, as six rate hikes have already been priced in the dollar quotes, the further correction of the US stock indexes can press down the EURUSD bulls.
Currently, things are going just as investors expected in late 2021. Concerns about Fed’s aggressive rate hike spurred the Treasury yields and sent the S&P 500 down. The dollar strengthens. However, the greenback still has its weak points, as it is pressed by the central banks, competing with the Fed, that announced monetary tightening. For example, the ECB’s hawkish pivot is now referred to as a head start by fundamental analysts and a dead cat bounce by technical analysts.
Following hints at monetary normalizing, Christine Lagarde has backstopped, saying that a too aggressive rate hike will hinder the euro-area economic recovery. Other ECB members share the same viewpoint. The FOMC officials, conversely, stick to a more aggressive stance encouraging the derivatives market to bet on six rate hikes in 2022 and widening the US-Germany yield spread. The EURUSD has naturally moved to 1.135.
However, the Fed’s aggressive speeches serve a demonstrative purpose. The FOMC officials want to lower inflation expectations so that high prices won’t become a self-fulfilling prophecy. The Fed’s policymakers seem to be demonstrating that they are working. Their hawkish speeches could be just speeches rather than a will to act. If US inflation slows down, the Fed could also back step. As a result, the number of rate hikes in 2022 projected by the market could, and the US dollar will be under pressure.
This scenario could start realizing in the week ending February 18, when the FOMC officials could soften the tone amid the sell-off in the US equity market. For example, San Francisco Fed President Mary Daly said that abrupt and aggressive action could have a destabilizing effect on the very growth and price stability.
Weekly EURUSD trading plan
I don’t believe in the Russian invasion of Ukraine, more than 20% S&P 500 drop from January highs, and six Fed rate hikes in 2022. Therefore, I will enter longs if the EURUSD closes above 1.136 and 1.1315.
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