Usually, after the release of strong data, US stock indices grow. However, the market has long been evaluating data through the prism of the Fed’s monetary policy. The hope for a continuation of the rate hike cycle strengthens the dollar. Let’s discuss this topic and make up a trading plan for EURUSD.
Weekly US dollar fundamental forecast
Fed policy has been data-driven for several months now. However, the markets’ reaction to the US macro statistics shows that the numbers are less important than the reaction to them. Usually, strong economy data allows stock indices to rise due to improved expectations for corporate profits. However, markets have long perceived data through the prism of the Fed’s monetary policy. The central bank has already raised rates by an enormous 450 bps, and the economy remains resilient. This means that the better the data, the more likely the borrowing cost will rise above 5.25%.
A similar situation occurred in the eurozone, where the fifth consecutive CCI rise to a yearly high did not strengthen the euro. According to Nomura, previous consumer surveys have overestimated the negative outlook for economic growth. Amid lowered expectations, the eurozone’s resilience and its ability to avoid a recession fueled the EURUSD rally from December to January. The question is, are the short-term GDP growth prospects overstated in the polls? If the market really thinks so, then strong eurozone PMI data could weaken the major currency pair.
Reaction to data is an important element of Forex price formation. However, in many cases, it can be compared to short-term EURUSD fluctuations. To understand trends, it is important to understand the rhetoric. At the beginning of 2023, everyone was focused on a rapid inflation slowdown and the imminent start of a recession. Now everything is different.
The pause issue has become very popular in the market. But not in the Fed’s monetary restriction but in the inflation dynamics. It may plateau before falling further. In this case, the central bank will be forced to raise rates more than expected. This will trigger a deeper downturn than investors expected this year. A recession is a very bad news for the S&P 500. According to research by Deutsche Bank, during such periods, the broad stock index has declined an average of 24% since 1946. Now it is clear why strong macro statistics cause stocks to fall. Markets are waiting for a later but deeper recession.
The deterioration of risk appetite supports the US dollar, as are forecasts of a higher peak in borrowing costs or investors abandoning the idea of a dovish reversal in 2023. However, the EURUSD correction has stalled. This may be due to the optimistic outlook for the US and European economies and the stabilization of the Fed-ECB interest rate differential. To accelerate the euro fall, an increase in the possibility of raising the federal funds rate by 50 bps in March is required.
Weekly EURUSD trading plan
The inability of EURUSD to rise above 1.07 indicates the bulls’ weakness. As long as the pair stays below this level, focus on sales in the direction of 1.058 – 1.061.