The ECB doesn’t want the EURUSD to fall. However, the central bank will lose credibility if the Forex interventions fail. This circumstance, coupled with the political crisis in Italy, puts pressure on the euro. Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
In contrast to the early 2000s, when the euro fell below parity against the US dollar, traded in this area for a little less than three years, and there was a lot of talk about a crisis of confidence in the new currency, currently, no one helps the EURUSD bulls. The Fed is happy with a strong greenback, and the ECB is worried about the loss of credibility if the actions to stabilize the euro turn out to be a failure. There will hardly be coordinated foreign exchange intervention. This means that the main currency pair has room to fall.
As long as there is a recession risk, entering the USD shorts is irrelevant. The Bloomberg USD spot index, which tracks the greenback movement against a basket of advanced and emerging markets currencies, has surpassed the levels of 2020 and hit a new all-time high. While the demand for the greenback as a safe-haven asset in anticipation of a global downturn is unprecedented, the Fed seems ready to tighten monetary policy most aggressively. Money tends to flow to countries that offer a combination of higher economic growth and higher interest rates. At the moment, it is definitely the United States.
It is no wonder hedge funds continue adding up to the US dollar longs. The number of long positions is far from extreme levels, so the USD still has room for growth.
In addition to the energy crisis, Europe faces a political crisis in Italy. Mario Draghi, as the Prime Minister of Italy, reassured financial markets. Not surprisingly, the news of his resignation resulted in turmoil.
Political unrest in the eurozone’s third-largest economy could complicate efforts by the European Central Bank to raise rates. The ECB’s main difficulty is tightening monetary policy while averting problems in the bond markets. Higher borrowing costs will hit countries with large debt, such as Italy.
The ECB capacities are limited, while the Fed has room for maneuver. The rise in the US producer prices to 11.3% is further evidence that inflationary pressures in the economy remain elevated. This is pushing the Fed to take aggressive action.
At the same time, the gradual recovery of US stock indices after their crash on the PPI data and Christopher Waller’s moderately hawkish stance allowed the EURUSD bulls to consolidate the price at parity. The Fed governor says a 75 basis-point hike is “huge” and that if the Fed opts for such a move, it wouldn’t mean officials are failing to confront price pressures. He warns that not hiking the rate by 100 basis points doesn’t mean the Fed is not doing its job.
Weekly EURUSD trading plan
I believe the EURUSD downtrend will continue. However, there should be a kind of correction up. If the price goes back to the resistances at 1.007 and 1.012 and breaks up these levels, the upward correction could continue.