Easing geopolitical risks due to the return of part of the Russian troops to the base encouraged the EURUSD bulls. However, the euro rally is not going to be that fast. Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
One good day doesn’t mean that uncertainty has eased. The US stock indexes have compensated for the three-day drawdown amid the information about the withdrawal of part of the Russian troops from the borders with Ukraine. The EURUSD has strengthened. The euro bulls managed to drive the price to $1.135, but their positions still look vulnerable due to the tense geopolitical situation in Eastern Europe. Especially since US and European officials have said they have not seen a significant reduction in military forces, and the Ukrainian government has reported new cyberattacks.
According to the ECB, given the current level of gas prices, the euro-area GDP will miss 0.2% in 2022, a 10% increase in the cost of gas will increase losses to 0.7%. The euro-area economy will be pressed down by net exports, as it was in December, when high energy prices pushed the region’s merchandise trade deficit to €9.7 billion, the highest since 2008.
Positive geopolitical news has shadowed the US producer prices surge by 1% M-o-M in January, the highest rate since May 2021. Over the past twelve months, it has been 9.7% up. In addition to the consumer price growth to 40-year highs, the surge in producer prices is a strong argument for the Fed’s aggressive monetary tightening. The World Bank suggests the same idea. Carmen Reinhart says the US Federal Reserve should tighten monetary policy soon and decisively to head off what could become “quite persistent” inflation.
Since the term of Paul Volcker in the early1980, the USA hasn’t had to manage such a high level of consumer prices. At that time, the fight against inflation resulted in a recession in the USA and many other countries. Historically, the Fed has never managed to lower the CPI without an economic downturn. This time, Jerome Powell will try to make an exception to the rule. Furthermore, the expectations of policy-makers’ hawkish speeches in the minutes of the Fed’s February meeting will set back the EURUSD bulls.
Moreover, the ECB’s hawkish pivot, discussed following the last central bank’s meeting, is now in question. Christine Lagarde tried to convince investors that monetary normalizing would be gradual and smooth. Nonetheless, Isabel Schnabel says the ECB should take into account the growth in the cost of property ownership when calculating the CPI, suggesting that the Governing Council’s hawks have weight. Unlike the Fed, the ECB does not take into account the pace of rent changes, whose growth of 8.8% could further accelerate the euro-area inflation. According to Schnabel, the consumer price rise to 5.1% in January the fall in unemployment to a record low of 7% suggest a risk that the ECB could be too late in its actions.
Weekly EURUSD trading plan
I believe further de-escalation of the conflict in Eastern Europe will support the EURUSD rally. One could add up to the longs, entered earlier, when the price breaks out the resistance at 1.137. Bulls will have a reason to buy the euro if the minutes of the FOMC February meeting will be less hawkish than currently expected.
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