Mario Draghi tried to save the euro by words, but Christine Lagarde resorts to deeds. An emergency meeting of the ECB with the promise of an anti-fragmentation program stabilized the EURUSD. Is this enough for the euro to grow? Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
The ECB emergency meeting was devoted to saving the euro and preventing the currency union from fragmenting. This is what Christine Lagarde said before the European Parliament. Panic in the financial market could raise the cost of borrowing for weaker euro-area countries to levels that would drag them into a financial crisis. Such a crisis could limit the ability of the central bank to raise rates, so the turmoil in the debt market should be averted. The ECB’s willingness to take active steps to save the euro encourages the EURUSD bulls.
Unless the Governing Council had held an emergency meeting, Italy’s bond yields would have jumped not to 4% but 5%-6% over the next few weeks or even days. An increase in the debt servicing cost to more than 150% of GDP would put pressure on the economy and increase the risks of default and the euro-area break-up. The ECB will not allow this.
Only by stabilizing the bond market can the European Central Bank raise the deposit rate by 25 basis points in July and continue the cycle of monetary tightening policy in September. Christine Lagarde outlined such a plan before Parliament, clearly hinting at a big step in early autumn. At the same time, higher-than-expected demands of Germany’s largest trade union IG Metall for a 7%-8% increase in wages have spurred the growth of European bond yields and EURUSD on the expectations of faster monetary tightening by the ECB.
Furthermore, analysts still talk about the high risks of a recession in the USA, encouraging the stock buyers and the greenback sellers. History shows that 9 of the 12 major Fed monetary tightening cycles since the 1950s ended in a recession.
Goldman Sachs has raised its estimates of the recession risks to 30% in 2023 and 25% in 2024 if it doesn’t happen a year earlier. As a result, the cumulative chance of a recession in the US economy over the next two years has been 48%, which is higher than 35% in the previous forecast. At the same time, the bank suggested that the recession caused by excessive but gradual rate hikes is likely to be shallow. The labour market will suffer the most, as the unemployment rate will rise by about 2.5%.
A shallow recession will hardly make the Fed change the plans for monetary tightening as the EURUSD bulls hope. Furthermore, the bear momentum in the US stock indexes is far from being exhausted, supporting the demand for the greenback as a safe haven. According to research by Goldman Sachs, the S&P 500 has fallen 15% or more 17 times since the 1950s, and in 11 of those cases, the downtrend turned up by the time the Fed’s monetary policy had been eased. The US central bank doesn’t care about this now.
Weekly EURUSD trading plan
The ECB’s decisiveness, the expectations of faster deposit rate hiking due to the rise in Germany’s wages, and talks about a recession make the EURUSD be trading in the range of 1.046-1.056. If the price breaks out the lower border of the range, it will be relevant to sell. One could consider buying if the pair goes above the upper edge of the above-mentioned price zone.
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