Investors continue to speculate about what the ECB’s hawkish shift means. Is it really about a soon monetary normalization, or is the central bank trying to curb inflationary expectations? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly euro fundamental forecast
If the omicron does not hit the US labour market, what will press it down? Will it be the federal funds rate hike by 50 basis points in March, whose odds went from 1:7 before the January jobs report to 1:3 after? Will it be the rise in 10-year Treasury yield, the benchmark for borrowing costs across the spectrum of assets from mortgages to corporate loans, to 1.93%, the highest since December 2019? The US dollar should have strengthened amid the turmoil in the derivatives and bond market. However, the EURUSD bears haven’t been so successful.
In January, the US nonfarm payrolls added 467,000, while Bloomberg experts predicted 150,000. Besides, the data for the previous two months were revised up by 709,000, and wages jumped by 5.7%, which is twice the average of 3%, recorded before the pandemic. Remarkably, if it were not for the omicron and the cold weather, the data would be even better. About 3.6 million Americans didn’t go to work due to illness amid extremely high numbers of people infected with COVID-19.
A strong labour market and an acceleration in inflation, which, according to Bloomberg experts, will reach a new 40-year high in January, is a reason for the Fed’s rate hike in March, May, and June. This circumstance allows the US dollar to strengthen against a basket of major currencies. Only the euro hasn’t weakened amid the robust data on US employment.
One could argue what the ECB’s hawkish shift means, but the market signals that things radically changed on February 3. Yes, the EURUSD bears do not go desperate and still bet on the divergence in the Fed’s and ECB’s monetary policies. The greenback buyers note that the ECB hawks have been calling for monetary tightening for 11 years, and nothing has changed. Even the deposit rate hike to 0% is not a solid argument to buy the euro, as the Fed could hike the federal funds rate to 1.5% by the end of the year.
However, expectations, not facts, are what matters for markets. Five rate hikes in 2022 have been already priced in the US dollar quotes, while the derivatives market’s forecasts for the ECB’s rate hike by ten basis points by June and 50 basis points by December are something new. Goldman Sachs expects the ECB interest rate to rise by 25 basis points in September and December, while the president of the Bank of the Netherlands, Klaas Knot, calls for a 25 basis-point increase in borrowing costs in the third quarter. All this confirms the hawkish shift theory and contributes to the growth of EURUSD volatility. This is good news for the euro as a funding currency.
Weekly EURUSD trading plan
I suppose, following a roller coaster in the last two weeks, the major currency pair could be trading flat in the week ending February 11. One could buy the EURUSD on the corrections followed by the rebounds up from the support level of 1.14, 1.135, and 1.13. It will also be relevant to buy if the euro goes above $1.1465.