EURUSD‘s first reaction to retail sales was correct. The pair declined in response to strong data due to concerns about higher Fed rates. However, then everything changed. Why did it happen? What will happen next? Let’s discuss this topic and make up a trading plan.
Quarterly US dollar fundamental forecast
When does good news become good for the markets? The answer to this question is extremely important for understanding the future dynamics of various assets, including EURUSD. Initially, US stocks and the major currency pair fell after an impressive 3% MoM jump in January retail sales. However, the market subsequently recovered, taking the positive from the economy as a reason for the rally. Why?
The best retail sales dynamics in two years, the first increase in industrial production in the last three months, an incredible 517 thousand rise in employment, and a 0.5% MoM inflation acceleration suggest that US consumers are in excellent shape, and the US economy will easily avoid recession at the beginning of the year. A leading indicator from the Atlanta Fed raised expectations for first-quarter GDP growth from 2.2% to 2.4%.
Such a huge positive from the US macro statistics suggests that the economy easily withstood the most aggressive monetary restriction cycle in decades, and the Fed’s efforts to cool it are in vain. This means the US central bank should raise rates more than the markets expect.
In early February, CME derivatives predicted a peak in borrowing costs of 4.9%, followed by a 50 bps decline by the end of 2023. They currently forecast a ceiling of 5.25% and federal funds rate cut of 25 bps this year. At the same time, the probability of three acts of monetary restriction in March, May, and June is regarded as 50/50.
The economy remains strong, and inflation is unwilling to slow down at the same rate. However, both indicators have room to change. The expected peak could rise, while the 2023 dovish reversal ideas could disappear. This is very good news for the US dollar. All the more surprising is the EURUSD’s inability to consolidate below 1.07.
All because of the rally in US stock indices, for which good news has become good again. ING believes the rise in retail sales is temporary, as it is associated with abnormally warm weather. It is necessary to assess the current situation more broadly.
In 2022, the US dollar strengthened, primarily due to the leading position of the US economy. The US outperformed China, infected with COVID-19, and the Eurozone burdened by proximity to Ukraine and the energy crisis. In 2023, everything changed. Is it possible to compare the US growth of +2.4% with China’s GDP of +5%, according to IMF forecasts? The US is acting as an additional driver of global economic growth. If growth is stable, risk demand will remain high.
Quarterly EURUSD trading plan
Under such conditions, the EURUSD correction potential is limited by the zone of 1.05-1.06. The main currency pair will rise in three months to 1.1, and by the end of the year, it will reach 1.15. Thus it is reasonable to switch from short-term sales to medium-term purchases.