Euro is to strengthen. Forecast as of 01.02.2022

Euro bulls have been waiting for good news for a long time. And the news has come. The US stock indexes have increased, the data on the euro-area economy and Germany’s inflation are positive. Will the EURUSD strengthen? Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

Although January was a successful month for the US dollar, the last day of the month turned out to be an unpleasant surprise for the EURUSD bears. The major currency pair featured the best daily rise since November amid several factors. The US stock market has started growing, the euro-area economy has returned to pre-pandemic levels, the Germany inflation has been higher than the forecast, and investors are again concerned that the Fed’s aggressive monetary tightening will press down the US GDP.

Although the euro-area economy slowed down in the fourth quarter from 2.2% to 0.3% Q-o-Q, it marked a record growth in 2021; for the EU, the year was the best since 1971. GDP expanded by 5.2%, which is slightly lower than in the USA (+5.7%). Gross domestic product in Italy grew by 6.4%, showing the best performance since at least 1995, and the French economy has grown at the fastest pace since 1969. The negative impact of the pandemic on GDP in the euro area has eased, as governments are less willing to impose restrictions, as before.

The epidemiological situation in Europe looks better than in the USA, so the euro-area economy may overtake the US one in the first quarter, which is good news for the EURUSD bulls. In addition to the persistence of elevated inflation in Germany, this circumstance increases the pressure on the ECB, pushing it to normalize monetary policy. The German consumer prices in January slowed not to 4.7%, as Bloomberg experts predicted, but to 5.1% due to the energy crisis and continued problems with supply chains. Perhaps the European Central Bank’s prediction that inflation should be hump-shaped is wrong. If so, then the expectations of the derivatives market for a 25 basis-point increase in the deposit rate by the end of 2022 do not look so fantastic.

Following the euphoria resulted from form Jerome Powell’s speech, the EURUSD bears seem a bit discouraged. Analysts again suggest that too aggressive monetary tightening could lead to a recession.

Standard Chartered Bank predicts that the yield curve, the leading indicator of an impending recession, will become completely flat by the middle of the year and could invert at the end of 2022. At the same time, Esther George says the central bank could take less aggressive actions in raising interest rates by shrinking the balance sheet more forcefully, which should help to avoid dangerous financial imbalances. Markets interpreted the speech of one of the FOMC main hawks as a bit dovish. Perhaps, the Federal Reserve Bank of Kansas City President wants to warn that the five federal funds rate hikes expected by the derivatives market in 2022 are too many.

Weekly EURUSD trading plan

The US dollar is pressed down by the concerns about a drop in US employment in January, which makes the EURUSD bears exit shorts. As long as the pair is trading below 1.132, the downtrend will continue. If the price rebounds down from 1.132 or 1.1275, one could consider entering shorts. If the market goes above the critical level, the idea of the downtrend reversal could return to Forex.

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