Unlike the Fed, which was decisive in the first half of the monetary tightening cycle, the ECB is just starting to take active steps. How does the difference in the views of central banks affect the EURUSD? Let’s discuss this topic and make up a trading plan.
Quarterly Euro fundamental forecast
To succeed in trading, one should correctly predict the direction of the price movement and enter a trade at the right time. There is always a risk of entering a position too early or too late. A typical example is the EURUSD. The uptrend is likely to recover, but is the pullback completed? Someone thinks so, and buys the euro without waiting for Jerome Powell’s speech before the US Congress and the US jobs report for February. Someone prefers not to go ahead of the father in hell.
Why does the EURUSD bullish trend have a high chance of continuing? It’s all about the decisiveness of the ECB and the caution of the Fed. The US central bank began a cycle of monetary tightening ahead of its European peers. Unlike in 2004-2006 and 2015-2018, it has aggressively raised rates and should have achieved the goal — inflation expectations have been anchored. However, every policy has its drawbacks. Aggressive monetary restriction is no exception. Investor wonder if the US economy is more stable than expected or the effect of aggressive rate hikes is not yet fully reflected.
The dilemma doesn’t just make the regulator slow down, it suggests doubts. Yes, there is a danger of not doing enough to bring inflation back to the target, and prices will start to rise again, as they did in the 1970s. However, there is also the risk of going too far and hurting the economy. Doubt leads the Fed to be cautious. The ECB, conversely, is to act decisively.
While investors are debating whether Jerome Powell will talk about disinflation, the mention of which in early February sent US stocks and EURUSD up, or forget about it, there are other topics that matter in Europe. There, consumer prices show no signs of slowing down, and core inflation has set a new record of 5.6%. This makes the ECB sound aggressively.
Following Christine Lagarde, who said that the European Central Bank needs to kill the inflationary monster, the EURUSD bulls were encouraged by Robert Holtzman. The governor of the Bank of Austria wants four rate hikes by 50 basis points to 4.5%, since three rate hikes will not be enough. The ECB interest rate is just entering restrictive territory.
Quarterly EURUSD trading plan
Nomura forecasts that the ECB rate will rise to 4.25%, and the derivatives market in general is not averse to pushing the expected ceiling higher. At the same time, expectations for a peak in the federal funds rate remain firmly anchored at 5.5%. It takes a very strong US jobs report to boost it. I do not think this will happen. Therefore, I would prefer buying EURUSD with a target at 1.1-1.12 in three months. However, ahead of the important economic report, there can well be false breakouts.
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