With record inflation in the eurozone, which does not intend to decline, unlike the US, the ECB should continue to raise rates aggressively. How does this affect EURUSD? Let’s discuss the topic and make up a trading plan.
Weekly Euro fundamental forecast
The Fed began to tighten monetary policy earlier and more aggressively than the ECB. Now the US regulator needs to slow down the increasing cost of borrowing. ECB officials should think twice before doing so. The chances of the deposit rate 75 bps increase in December are higher than the increase in the federal funds rate. This fact contributes to the bullish EURUSD.
According to ECB executive board member Isabelle Schnabel, there is no need to slow down the rate of monetary restriction now. First, massive fiscal stimulus by governments could keep inflation high for longer than expected. Second, expectations of a less broad ECB move in December pushed down European bond yields and boosted stock indices, weakening financial conditions and making fighting high prices difficult. Third, the biggest misconception is the assumption that inflation will fall quickly. Most likely, it will remain high for a long time.
Isabelle Schnabel urges the ECB to bring the cost of borrowing to the maximum permissible level as soon as possible. However, you need to understand that the central bank, in a changing environment, needs to be extremely cautious. The latest consumer confidence, PMI, and business climate data are better than expected. Together with the fall in gas prices, this indicates that the recession in the eurozone will be less deep than expected. The European economy will soon start to recover, so the ECB needs to think about how to support this process.
Eurozone strong data strengthened European stock indices. They have been outperforming the S&P 500 lately, contributing to the capital flow from North America to Europe and helping start the EURUSD rally.
Thus, the Fed and the ECB are in different positions and should act differently. However, both central banks must suppress unpredictable inflation. On the one hand, the fall in the cost of raw materials due to the lockdowns in China contributes to lower prices. On the other hand, if supply chains are disrupted amid the COVID-19 outbreak in China, prices could rise again.
Weekly EURUSD trading plan
EURUSD will fluctuate a lot in the future. Investors should not count on a “buy a dollar and hold it” strategy that has been effective in 2021-2022. From time to time, it will be necessary to take profit and switch strategies. So, if the price falls below 1.038, it would be reasonable to enter short trades.