Is it too early to buy euro? Forecast as of 09.02.2022

You can’t be sure of anything in Forex. The EURUSD trend may not turn up, and the pair could start consolidation. Furthermore, the US dollar also has a lot of advantages. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

Central banks often express their willingness to normalize monetary policy slowly and cautiously because they don’t want to cause panic in financial markets. The Fed, as a rule, follows stock indexes while the ECB refers to the European bond market. The rise in the euro-area bond yields made Christine Lagarde and her colleagues sound dovish again.

Besides, Bank of France Governor Francois Villeroy de Galhau said Investors may have overreacted to what they see as a hawkish pivot from the European Central Bank. He says the ECB calendar doesn’t correspond to an underlying calendar of markets. “I think there were perhaps reactions that were very high and too high in recent days,” Villeroy said. It looks like a clear hint at the expectations of the deposit rate hike by 50 basis points by the end of 2022 and the first monetary restriction act in June.

The speeches by Christine Lagarde and Francois Villeroy de Galhau must have aimed at claiming the euro-area bond market. The spread between Italian and German government bond yields, which is a key indicator of market stress, has widened by 30 basis points at once. Furthermore, the ECB’s return to the dovish tone makes the EURUSD bulls doubt that the trend has turned up. Due to the slow growth of wages in Europe, inflation in the euro area could draw a hump earlier than in the USA.

Besides, the euro-dollar rise this time could be associated not with the ECB’s hawkish pivot but with the general trend of the weakening of the US dollar against other world currencies. Five federal funds rate hikes have been already priced in the greenback quotes, and the flattening yield curve signals that investors are growing more concerned that the Fed’s aggressive monetary tightening could press down the US GDP. That is why the EURUSD bears are set back.

Nonetheless, the US dollar still has its advantages. We all remember how the greenback was rallying up in 2018 because of the market turmoil resulted from trade wars. This scenario could return this year. In 2021, the US trade deficit increased by 27% Y-o-Y, reaching a record high of $859.1 billion. The previous one was recorded in 2006 and amounted to $763.53 billion. The negative trade balance with China jumped by 14.5% to $355.3 billion, eliminating all gains caused by Donald Trump’s protectionism. According to the Institute for International Economics, China has fulfilled its obligations to the United States by only 57%, and the White House is very dissatisfied.

Weekly EURUSD trading plan

A new round of the US-China trade war must press down the US stock indexes, which are already down because of the Fed’s willingness to tighten monetary policy aggressively. An S&P 500 correction could send the EURUSD down, so the downtrend may not be broken, and the pair will continue consolidating. Time will show. After all, who said that the US stock market will necessarily crash? If the stock indexes rally up and the euro breaks out the resistances at $1.144 and $1.1465, the major currency pair should continue rising.

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