US dollar: back to normal? Forecast as of 23.02.2022

The reaction of financial markets to the size of Western sanctions against Russia indicates that investors are satisfied. Is it time for them to focus on inflation and monetary policy? Is the war matter already closed? Let’s discuss the topic and make up a trading plan for EURUSD.

Weekly US dollar fundamental analysis

Enough shocks. After the Russian invasion of Ukraine, the West imposed sanctions against the aggressor, and the markets calmed down. Judging by the oil correction, the recovery of part of the losses by US stock indices, the growth of treasury bond yields, and the sale of safe-haven currencies, investors are satisfied with how the situation in Eastern Europe is developing. So, it’s time to return to the good old monetary policy.

Sanctions against Russian oligarchs, the banking sector, and the sovereign debt market, as well as the suspension of Nord Stream 2 construction, did not cause a serious shock to financial markets. As expected, the West did not influence the oil and gas sector, which could seriously impact the entire commodity market due to the threat of retaliatory measures from the Kremlin. In general, the geopolitical storm turned out to be not as terrible as one might have expected. Safe-haven assets well prove this. The closing of large-scale yen short trades could have provoked a sharp strengthening of this currency after the Russian invasion of Ukraine, but this did not happen.

The Ukrainian events stopped an epic rout in the US Treasury market. Due to the escalation of the conflict, treasury yields began to decline amid growing demand for safe-haven assets. However, after the imposition of sanctions, debt rates began to rise again. Investors are again worried about inflation and monetary policy. According to 48% of JP Morgan’s over 700 institutional clients, inflation is the top driver of financial market pricing in 2022.

Investors missed the news of central banks. This confirms the NZD rise in response to the third consecutive cash rate increase by the RBNZ and the USD strengthening amid a higher possibility of a 50 bps increase in the federal funds rate in March from 13% to 34% after FOMC member Michelle Bowman’s hawkish speech.

EURUSD bulls are supported by an increase in the IFO business expectations index to July highs and the fall in consumer confidence in the US to 110.5, the lowest level since September. While German companies have become more self-confident after the country coped with the latest outbreak of COVID-19, American consumers were concerned about the impact of high inflation on their earnings and economic growth.

In my opinion, the further EURUSD dynamics will be determined by the possible future of the Russia-Ukraine conflict and the monetary policy of the Fed and the ECB. If Moscow repeats the Crimean scenario with the annexation of the Lugansk and Donetsk regions, this will be a serious shock to the financial markets. If the situation settles down, investors will again focus on rates.

Weekly EURUSD trading plan

In the short term, the exit of EURUSD price beyond the lower border of the consolidation range of 1.128-1.138 can cause a fall to the zone of 1.117-1.121, where it is profitable to buy the euro. It is also relevant to enter longs on breakouts of resistance at 1.136 and 1.138.

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