The sooner the end of the conflict in Ukraine, the better European currencies perform. The EURUSD is naturally rising amid the de-escalation. However, investors could be too optimistic. Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
Euro is the currency of optimists. Those who believe in a soon peace in Ukraine. They are willing to buy risky assets and happy about the US stock indexes rally. They believe Christine Lagarde, claiming the recession and stagflation in the euro area should be averted. Do they wear rose-tinted glasses? Nonetheless, the EURUSD has performed the best daily rally over the past three weeks amid the signs of the Ukrainian conflict easing, a 10-day rally in the S&P 500 over the past eleven trading sessions, and expectations of German inflation accelerating to 40-year highs.
Can the Russians who announced the withdrawal of troops from Kyiv be trusted? The Western politicians consider the retreat to be tactical, and recent history shows that such actions could be a war ruse. On the eve of the so-called military operation, Russian troops also retreated from the border with Ukraine, only to cross it in a few days. The market wants to hope for the best, but Bank of America warns that 10-day rallies in US stock index bear markets have been commonplace. Since 1927, four of them have outperformed the S&P 500 current surge by 10%. When the Fed is willing to tighten financial conditions and unwilling to provide any support for stocks, one should be extremely careful with the purchases.
The US two-year yield has exceeded the 10-year, inverting yet another segment of the Treasury curve and reinforcing the view that Federal Reserve rate increases may cause a recession. The inversion occurred as two-year yields rose while 10-year yields declined, crossing at a level of about 2.39%. The last time the curve inverted was in 2019 during a US trade spat with China, and in 2020 the US and global economies suffered a recession due to the pandemic.
Despite the joke that the market has correctly predicted a recession four times out of nine, the fact that it is signaling a pending downturn deprives the dollar of such an important advantage as the US exclusivity. Yes, the US economy looks better than the European one right now; it is farther from the war zone than the euro area, but if the Fed raises rates to 2% or more in 2022, will the GDP rate remain stable?
The euro is supported by expectations that inflation in Germany will accelerate above 6%, which will be the first such case since the 1990s. If consumer prices rise even higher, it will be a 40-year high. If so, the ECB will be forced to take active steps. The governor of the Bank of Austria, Robert Holzmann, believes it is necessary to raise the deposit rate twice in 2022 to avoid an aggressive monetary tightening in the euro area in 2023.
Weekly EURUSD trading plan
In my opinion, if the EURUSD doesn’t break out the trading range of 1.089-1.1165, it will prove the weakness of bulls, suggesting one should sell. Also, don’t forget about the principle “buy the news, sell the facts” in relation to the upcoming report on Germany’s inflation. However, if buyers drive the price outside the above-mentioned trading range, the euro-dollar could go up to 1.1225 and 1.127, but its return inside the range will be a bearish sign.
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