The EURUSD bulls go ahead amid the expectations of the ECB’s hawkish surprise and a slowdown in the US inflation. Will the uptrend continue? Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
The Fed’s plan is working. The US inflation and employment are slowing down due to the monetary tightening and the hawkish stance of the FOMC members suggesting two 50-basis-point rate hikes in June and July. While the job growth rate is declining it seems that the Fed will achieve a soft landing and avert a recession. The plan is working, why should the Fed change it and make a pause? If the Fed won’t make a pause in September, there is no sense in selling the US dollar.
The US employment increased by 390,000, the worst performance since April 2021, but it isn’t bad news for the greenback. Before the pandemic, there were 150,000 new jobs each month. Now, there are twice as many. The labour market is still overheated, but not as much as earlier. Average wage growth has slowed down from 5.5% to 5.2%, which means inflationary pressure is near a peak. Bloomberg experts expect a slowdown in the core CPI in May to 5.9% from 6.2%.
However, these results won’t make the Fed pause. Cleveland Fed President Loretta Mester said that if inflation does not recede, she will vote in September to raise the federal funds rate by 50 basis points.
I have many times stressed that the USD drawdown from its 20-year highs results from two factors. First, there was a series of US weak domestic data, which increased the risks of recession, forcing investors to speak about a pause in the Fed’s monetary tightening and lowering the expected Fed rate size in July and September.
Second, other global central banks, including the ECB, started to sound more hawkish. The Governing Council’s meetings could support the single European currency. Christine Lagarde and her fellow central bankers could finish the asset purchase programme earlier than planned and discuss the deposit rate hike by 50 basis points in July.
The ECB faces a more difficult task than the Fed. The euro area is much more dependent on Russian oil and gas, and, therefore the energy crisis affects the euro-area inflation more than the US. Сonsumer prices in the currency bloc are rising unevenly: by 5.8% in France, by 8.7% in Germany, and by 20.1% in Estonia. Furthermore, the problems of individual members of the euro area with public debt make high rates dangerous. However, the European Central Bank needs a reboot.
Weekly EURUSD trading plan
The EURUSD bulls are supported by the expectation of the ECB’s hawkish surprise and a slowdown in the US inflation. Therefore, one could buy the pair if the price breaks out the resistance at 1.077. Otherwise, if the euro doesn’t break out level $1.084 or goes below $1.07 and $1.068, it will be relevant to sell.