The emergence of a new strain of COVID-19 has once again forced economists to turn into epidemiologists, as it was in 2020. However, there are more significant factors of Forex pricing. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Fundamental US dollar forecast today
Omicron or monetary policy? 19 out of 46 Reuters experts believe that the main driver of pricing in financial markets over the next 3 months will be the difference in interest rates; 15 analysts are leaning towards the new strain of COVID-19, 9 experts indicated an increased demand for safe-haven assets as the major driver. Although the global epidemiological situation is still of concern for investors, they continue following the Fed’s actions.
Will the omicron displace other variants of the coronavirus, and will it turn into an analog of seasonal flu due to mild symptoms? Or will it sharply increase the death rate resulting in a new economic recession? Nobody knows. However, the dollar could be the currency that at least won’t lose in both cases. In the first, optimistic scenario, investors’ attention will return to Fed’s monetary tightening. History shows that from the first mention of the federal funds rate hike to the actual hike, the USD index has appreciated by an average of 4%. The second, pessimistic option will drive up the demand for the greenback as a safe-haven currency, as it did in 2020.
While investors wonder how the situation with the omicron will develop, the FOMC officials continue suggesting that the QE tapering should be accelerated. Cleveland Fed President Loretta Mester, San Francisco Fed President Mary Daly, and Atlanta Fed President Raphael Bostic fully support Jerome Powell’s idea of scaling back quantitative easing more quickly than currently anticipated. Randy Quarles calls such stimulus dangerous, as it could establish a precedent that the Fed can fund all manner of government projects, including even the “colonisation of Mars,” using the QE.
Quarles, who is stepping down as a Fed governor, notes the Fed’s mistake related to the transitory nature of high inflation. Fiscal and monetary incentives have increased the demand so much that it significantly exceeds pre-pandemic levels. Even if supply chain problems are resolved, prices will continue to be high. The central bank needs to raise rates to balance supply and demand. The Fed’s forecast for the inflation slowdown is wrong.
Thus, the Fed is determined to tighten monetary policy, which will support the US dollar in 2022, and possibly in 2023. However, the derivatives market doubts that the cycle of monetary restriction will last any longer. Its instruments are signaling that the economy will fail, and the central bank will have to cut rates in 2024-2025. This is contrary to FOMC forecasts.
EURUSD trading plan today
The strength of the US dollar is not endless, but for now, the EURUSD bears can take the advantages they have. The euro sellers believe that the 550,000 increase in employment predicted by Bloomberg experts for November will resume the euro-dollar downtrend. But for the omicron, I would share the same idea. Meanwhile, I suggest selling the euro on the breakout of supports at $1.129 and $1.127.
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