Euro holds wild card. Forecast as of 16.01.2023

The prospects for the global economy at the beginning of 2023 do not look as gloomy as at the end of 2022. The EURUSD bulls are actively capitalizing on this, especially since the rally potential due to the Chinese economy opening is very high. Let’s discuss this topic and make up a trading plan.

Monthly Euro fundamental forecast

As a rule, the USD falls as the global economy looks better than the US. That time has come. Most likely, inflation has passed its peak, and European gas prices have fallen below pre-war levels. According to the latest macro statistics, global GDP growth will be above the 1.7% expected by the World Bank in 2023. China’s rapid recovery from a three-year lockdown serves as a wild card. Against this backdrop, it’s no surprise that US stocks and EURUSD are rallying the best in two months, while the global bond market is set to close January with record gains since record-keeping began in 1991.

The German economy managed to avoid a technical recession thanks to government subsidies and a sharp decline in gas prices. In the fourth quarter, it rose by 0.1% QoQ after a contraction in the third. In 2022, GDP expanded by 1.9%, surpassing Bloomberg experts’ forecasts. Judging by the dynamics of the leading indicators, PMI, the recession in the eurozone will be mild and short-lived if it starts at all.
At the same time, Wall Street Journal experts predict a 61% chance of a recession in the US economy in the next 12 months. That number is down from 63% in the October survey but is still among the all-time highs without considering real recessions. The specialists believe that the combination of a faster inflation slowdown to 3.1% by the end of the year and an approaching recession will force the Fed to cut the federal funds rate. 51% of respondents believe this will happen as early as 2023, despite statements by central bank officials to the contrary.

Economists are forecasting a peak rate of 5%, which is in line with FOMC forecasts and futures market indications. According to derivatives, the borrowing costs in the US in 2023 will increase by 60 bps and in the eurozone by 140 bps. Thus, the EURUSD rally is based on the ECB’s faster monetary tightening compared to the Fed and optimism about the global economy’s outlook.

More than a third of the 201 global investors surveyed by MLIV Pulse believe that the ECB deposit rate will exceed 3.5%. 15% of respondents expect to see it at 4%, which will be a new record. Thus, for EURUSD, there’s nowhere to go but up. Pair’s confidence is based firstly on the fact that the Fed will soon complete the monetary tightening cycle. Secondly, there is a lot of uncertainty in the market about the future ECB rate ceiling.

Monthly EURUSD trading plan

How high will it be? With ECB becoming the major hawk, level 1.2 seems within reach. The main obstacle for bulls is a faster inflation deceleration in the eurozone than currently forecast. However, it’s too early to think about it. Continue EURUSD purchases towards 1.095 and 1.104.

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