Different nature of the inflation in the USA and euro area contributes to the divergence in monetary policy of the Fed and the ECB. The Fed can afford to raise rates six or seven times in 2022, the European Central Bank is forced to take a timeout. How does this affect the EURUSD? Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
A strong US jobs report and the talks that US is discussing with its allies an embargo on Russian oil allowed Brent to closely reach $140 and pushed the EURUSD towards parity. Investors actively discuss this idea. Bloomberg models suggest the chance that the euro will cost the same as the US dollar has increased over the past month from 2.4% to 11.9%. Considering how quickly targets, indicated in previous forecasts, are being reached, this should not be surprising.
The closer to Russia and Ukraine, the more problems you will have. Despite the fact that both the USA and the euro area are facing record high inflation in decades, its nature is different. Yes, there are supply chain difficulties in the USA, but a significant part of the increase in CPI and PCE is associated with domestic demand. To combat the recession, the White House and Congress allocated about 25% of GDP in fiscal stimulus, while in Germany — 13.6%, and even less in France, Italy and Spain. As a result, inflation-adjusted consumer spending in the United States is 12% above pre-pandemic levels, the German indicator fell, the French remained at the same level.
The USA is much less threatened by recession and stagflation than the euro area. The fact that the US inflation acceleration is based on domestic demand allows the Fed to tighten monetary policy with a clear conscience. Furthermore, the US unemployment fell to 3.8%, nonfarm payrolls added 678,000 and wages increased by 5.1%. The derivatives market bets on a 140-basis-point rise in the federal funds rate in 2022.
Different nature of the inflation in the USA and euro area contributes to the divergence in monetary policy of the Fed and the ECB. The Fed can afford to raise rates six or seven times in 2022, the European Central Bank is forced to take a timeout. How does this affect the EURUSD? Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
A strong US jobs report and the talks that US is discussing with its allies an embargo on Russian oil allowed Brent to closely reach $140 and pushed the EURUSD towards parity. Investors actively discuss this idea. Bloomberg models suggest the chance that the euro will cost the same as the US dollar has increased over the past month from 2.4% to 11.9%. Considering how quickly targets, indicated in previous forecasts, are being reached, this should not be surprising.
The closer to Russia and Ukraine, the more problems you will have. Despite the fact that both the USA and the euro area are facing record high inflation in decades, its nature is different. Yes, there are supply chain difficulties in the USA, but a significant part of the increase in CPI and PCE is associated with domestic demand. To combat the recession, the White House and Congress allocated about 25% of GDP in fiscal stimulus, while in Germany — 13.6%, and even less in France, Italy and Spain. As a result, inflation-adjusted consumer spending in the United States is 12% above pre-pandemic levels, the German indicator fell, the French remained at the same level.
The USA is much less threatened by recession and stagflation than the euro area. The fact that the US inflation acceleration is based on domestic demand allows the Fed to tighten monetary policy with a clear conscience. Furthermore, the US unemployment fell to 3.8%, nonfarm payrolls added 678,000 and wages increased by 5.1%. The derivatives market bets on a 140-basis-point rise in the federal funds rate in 2022.
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