Euro arms are too short. Forecast as of 17.05.2022

One should do everything on time. Otherwise, the goals may not be achieved. The Fed started to act too late, and it is trying to catch up with inflation. The ECB is trying to catch up with exchange rates. Where will the EURUSD go? Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

Currently, many of the world’s central banks face criticism due to their passive attitude towards inflation. The old mantra about the transitory nature of high prices doesn’t seem to work. Active steps should have been taken to fight the rising inflation. The first to act was the Fed, next, the ECB was in the game, which sent the EURUSD down towards parity.

The experience of the Fed teaches that tightening of the financial conditions comes before the monetary tightening begins. The hawkish stance of the FOMC members in the right direction is changing financial conditions, and the market trends suggest a federal funds rate hike to at least 2%. The European Central Bank has also turned hawkish. It means not only speeches about raising rates in July but also some kind of verbal intervention. The governor of the Bank of France, François Villeroy de Galhau, said that the ECB would closely monitor the moves in the real effective euro exchange rate as an important factor in imported inflation. A too weak euro would run counter to the goals of price stability.

However, the real reason is different. If EURUSD reaches parity, dollar-denominated energy prices will rise even more for the euro area, pushing the economy towards stagflation and recession. The ECB should put a barrier to the euro downtrend, but it can do little in the current situation.

There are three reasons for the 10% USD Index rally in 2022. Expectations that the Fed will raise rates more aggressively than other central banks. US economic dominance, which attracts capital from all over the world. The relative attractiveness of US assets as safe havens. Furthermore, the stronger the greenback, the more problems competitors face. These include higher import prices, more expensive external debt servicing, and a greater risk of financial instability. Besides, all economies, especially emerging markets, were pressed down by the COVID-19 pandemic.

Thus, the strengthening of the US dollar creates difficulties for the world economy and further increases its lag behind the American one. It is unlikely that the war in Ukraine will end in the near future, and China will cope with the pandemic, which will support the demand for the greenback as a safe-haven asset.

Therefore, the only way to support the euro against the US dollar is hawkish speeches by the ECB. The derivatives market sees a 90-basis-point increase in the deposit rate by the end of 2022 and Bloomberg experts believe that it will happen in July, September, and December.