The global central banks have put up with the dollar strengthening. Now they are willing to resist. How will this affect the EURUSD and other currency pairs? Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
For a long time, Jerome Powell avoided talking about a recession, expressing the hope that the Fed would be able to achieve a soft landing for the US economy. In his speech before Congress, the Fed Chair admitted that a recession is possible. The central bank is not trying to provoke an economic downturn but considers it necessary to reduce inflation. The Fed’s determination changes the balance of power not only in the EURUSD pair but also in Forex as a whole.
The Fed’s shift from recession denial to recession acknowledgment is critical for financial markets. Especially as the Fed’s research confirms that high inflation and low unemployment have preceded economic downturns in the past. They signal imbalances that may disappear as a result of a recession. Its expectation, as a rule, leads to a fall in stock indices and holds back the growth of US Treasury yields.
At the same time, the Fed’s determination to fight rising prices pushes other central banks to do the same. The situation is exacerbated by the belief that the currency exchange rate becomes important in assessing the inflation rate. When the USD index is in the area of 20-year highs, an increase in commodity prices, denominated in US dollars, makes the commodities more expensive for importers to buy. The inflation is rising higher, pressing down the GDP.
The central banks’ stances naturally change. A strong currency becomes a priority, and the global economy enters an era of reverse currency wars.
Over the past decades, devaluation has been favored, which has boosted inflation and improved the position of exporters. At the same time, it was believed that a weakening of the currency by 10% would reduce consumer prices by 0.5%. When the CPI levels are elevated, the transfer coefficient can be twice as high. In this regard, the intention of the world’s central banks to revalue their own monetary units, also by raising rates, looks sensible. How long will the dollar be the winner?
Dynamics of G10 currencies in 2022
Thus, financial markets are entering a new environment of stock indices bearish trends, Treasury yields stabilization, correction of oil and raw materials due to fears of lower demand amid a pending recession, and reverse currency wars. Which currencies will strengthen and which will weaken?
Weekly EURUSD trading plan
I believe the yen and the franc will lure investors in the near future. Commodity currencies, responsive to risks, will be pressed down. The EURUSD trading range widens to 1.046-1.06, but the further trend is yet hard to predict. I suggest selling the pair on the price growth, followed by a rebound down from the resistance levels of 1.0625 and 1.065.