The war only seems the main driver of Forex pricing. However, through its prism, one should evaluate the consequences for the economy and monetary policy, and only then predict what will happen to EURUSD. Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
Markets are facing dovish expectations. Bond yields around the world are plummeting on expectations that central banks will not aggressively tighten monetary policy amid a possible economic downturn due to Western sanctions imposed on Russia for its invasion of Ukraine. The euro-area bond yields have collapsed most quickly due to their territorial proximity to the conflict zone. So, the EURUSD has naturally dropped.
The ECB members sound rather dovish. For example, the governor of the Bank of Finland, Olli Rehn says the ECB should progress gradually and step by step in normalising the monetary policy. Therefore, the 10-year German yield has dropped below zero for the first time in a month. Money markets expect the European Central Bank to raise the deposit rate by less than 20 basis points in 2022. Until two weeks ago, they believed in its return to zero from the current level of -0.5%.
A similar situation is in the USA. The CME derivatives are no longer counting on a 50-basis-point increase in the federal funds rate in March and signal only five rate hikes by the Fed in 2022, instead of the previously expected six. The big Wall Street banks, by contrast, are holding on to their forecasts. Bank of America and Goldman Sachs still believe that the Fed will raise rates to 2% by the end of this year, and JP Morgan hopes to see this figure in early 2023. In their opinion, Jerome Powell and his colleagues will not remain passive due to a slight slowdown in GDP growth amid skyrocketing inflation.
The problem is that even before the war in Ukraine, the world economy was facing high prices. Events in Eastern Europe only exacerbated the difficulties. Raising the cost of raw materials will push up the CPI and send the population towards poverty.
The risk that things will go worse is growing. While the West avoids sanctions on Russia’s energy sector, the oil market has gone on strike anyway. Oil refiners refuse to buy Russian oil, and bankers refuse to finance it. The self-imposed embargo reduces the oil supply in the market, which was tough even without the war in Ukraine. Should we be surprised at Brent’s rise to $108 a barrel? What’s the next mark? $125?
Weekly EURUSD trading plan
Europe’s close ties with Russia suggest that a tornado will sweep over the euro area, while the US economy will feel only a slight headwind. The risks of a recession in the currency bloc are significantly higher than in the USA, which will set back the ECB hawks. Conversely, the Fed can afford to aggressively tighten monetary policy, but the European Central Bank cannot. For this reason, it is still relevant to sell EURUSD towards the previously announced targets at 1.105 and 1.092.