The greenback’s response to the FOMC hawkish stance proves that most of the positive for the EURUSD bears has been priced in the quotes. What’s next? Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
San Francisco Fed claims that the main reasons for excessively high inflation in the US are the people responsible for fiscal policy, whose actions led to a 3% increase in CPI by the end of 2021. Citigroup blames Jerome Powell and his colleagues for everything and warns that the Fed will not be able to avoid a recession as in 1994. At that time, inflation was lower, and the central bank was not as far behind the yield curve as it is now. According to the company, this fact increases the risk of a downturn in 2023 to 20% from 9 % in February.
Nonetheless, San Francisco Fed admits that but for fiscal stimulus, the recession would have been deeper, and the country would have faced deflation, which would be harder to cope with than the high inflation alone. Citigroup believes that the Fed’s errors result from the yield curve misinterpretation. While eurodollar futures are signalling a pending downturn, Jerome Powell’s preferred indicator, the spread between the current three-month Treasury bill rate and bets on where that will be in 18 months, suggests everything should be alright. The company stresses that the spread is the widest since 1994, the year the Fed always refers to when justifying its aggressive monetary policy.
Investors are interested not only in how much the federal funds rate will rise in March, but also in how far it will go. The derivatives market has increased forecasts of the so-called terminal fed funds rate, the one at which the Fed will complete the monetary restriction cycle, to just under 3%. In early February, it was just below 2%. The final value of the indicator affects how high the yield on 10-year Treasuries will climb. It exceeded the 2.55% level and then rolled back a little. According to TD Securities, the currently expected level of the terminal rate suggests a 2.65% yield by the end of 2022 and 2.75% by March 2023.
Differently put, the biggest move has already taken place and the US dollar has nothing more to expect from the bond market. In addition, analysts believe that the USD strengthens before the Fed starts monetary tightening and begins falling afterward, according to the principle “buy the news, sell the facts”.
Thus, the dollar gives the initiative to the euro. Most positive factors for the EURUSD bears have been priced in the pair quotes. Money markets have raised the chance of ECB rate hikes in 2022, which supports the euro. The ECB deposit rate could reach 0.5% this year.
Weekly EURUSD trading plan
In this environment, even close-to-forecast data on PCE and the US laboг market may weaken the dollar. Conversely, strong reports on Germany’s and European inflation will strengthen the euro. It is time to trade the news for the EURUSD traders, though the pair should continue consolidating in the range of 1.088 – 1.116.