Euro trapped by carry traders. Forecast as of 22.12.2021

How could the Turkish lira affect the EURUSD rate? Investors are selling funding currencies amid the stabilization of the situation in Turkey, holding back the euro bulls. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

Investors are focused on the Santa Claus rally and the lira strengthening ahead of Christmas. The S&P 500 1.8% rally after its worst three-day fall since September has spurred investor interest in US equities. Traders fear to miss out, because the Santa Claus rally, lasting five trading sessions before the New Year and three after it, as a rule, brings more profit to buyers than several weeks before December. In theory, it should support the EURUSD bulls. In practice, not everything is so simple.

Yes, the US dollar is a safe haven asset that tends to fall as global risk appetite improves, as evidenced by the rally in the S&P 500. On the other hand, the euro is one of the two major funding currencies, and investor interest in profitable assets, first of all, emerging markets’ currencies, returns, giving a reason to sell the EURUSD.

And the demand for EM currencies returns after several weeks of depression associated with the games of Recep Erdogan with the lira. It struck the Turkish President that inflation could be curbed not by raising rates but by lowering them, which led to a surge in USDTRY by 80% since the beginning of the year. Currency interventions did not help, and then Ankara took a decisive step. The Treasury will compensate the population holding deposits in the national currency for the weakening of its exchange rate against the US dollar. In fact, this is a hidden monetary restriction, which resulted in the lira’s most rapid appreciation since 1983. Its three-month volatility soared to 53%, exceeding the levels of the 2018 currency crisis.

The USDTRY could compensate for the losses, but the Turkish Treasury is taking on a foreign-currency risk of $265 billion. If the lira depreciates beyond deposit rates, that would impose a burden on the budget.  If the central bank prints money to make up the difference, then inflation, already above 21%, would spike.

Lira is an EM currency, and its stabilization will encourage carry traders, pressing down funding currencies, including the euro and the yen.

The US dollar is supported by expectations of faster growth of the US economy than its main competitors. According to the Federal Reserve Bank of Atlanta, US GDP in the fourth quarter will expand by 7% Y-o-Y. JP Morgan forecasts the euro-area and Chinese GDPs to rise 2% and 4%. According to Bloomberg research, the world economy will expand by 0.7% in October-December and the US economy – by 1.2% Q-o-Q. As a rule, if the US GDP rate outpaces the global one, the USD index rises.

Weekly EURUSD trading plan

Thus, improving global risk appetite and sales funding currencies keep the EURUSD in the trading range of1.1225-1.1355. The breakout of the consolidation range will determine the further trend. In the meanwhile, one should trade intraday or not enter any trades.

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