USD and Doom Loop. Forecast as of 09.11.2022

The ECB is satisfied with a 3.3% EURUSD rally in three days and is becoming more hawkish. However, little depends on the ECB’s desire to strengthen the euro. Let’s discuss the topic and make up a trading plan.

Weekly US dollar fundamental forecast

When US bond yields decline and German ones rise, it becomes clear that the EURUSD rally was provoked not only by an improvement in global risk appetite and a slowdown in the Fed’s monetary policy but also by the hawkish ECB. The ECB bankers were in the shadow of the Fed for a long time, but as soon as the US dollar weakened, the Europeans began to claim leadership.

The November speeches of Governing Council officials remind the Fed a few months ago. Then Jerome Powell and his colleagues were ready to sacrifice their own economy to defeat inflation. Now European bankers support such a point of view.

President of the Deutsche Bundesbank Joachim Nagel says he will do everything possible for the ECB to normalize monetary policy, even if the measures taken weaken economic growth. If the ECB moves slowly and falls behind the curve, the costs will be higher. ECB vice-president Luis de Guindos said that rates must rise further, even if this reduces aggregate demand. This is the only way the ECB should follow. Governor of the National Bank of Belgium Pierre Wunsch believes that if the recession is shallow, the deposit rate will exceed the 3% expected by the market.

Thus, if the Fed intends to slow down the rate of monetary restriction and bring the federal funds rate to 5%, then the ECB is at an earlier stage. Looking at record inflation in the eurozone, European bankers understand the need to turn aggressively hawkish. As a result, the spread of US and German bond yields is narrowing, while EURUSD is growing.

It is easy to understand the members of the Governing Council, as a serious euro weakening leads to a rise in the cost of raw materials and imports, which pushes the eurozone into recession and accelerates inflation. The ECB wants the EURUSD to be higher, and so far, it is.

There is another reason for the hawkish ECB. According to a leading indicator from the Bank of Ireland and the employment website Indeed, the average salary in the eurozone accelerated to 5.2% in October. This is higher than in June (+4.2%) and 2019 (+1.5%).

Aggressive speeches by ECB officials would not have been enough for a 3.3% EURUSD rally in three days. Investors are actively getting rid of the US dollar, but its buyers are in no hurry to do so. TD Securities believes that the USD index will decline by 10% in 2023, but it still hasn’t peaked. Rabobank draws attention to the Doom Loop, which assumes that the weaker the rest of the world’s data, the stronger the greenback. Dutch Bank officials believe that other central banks will start to slow down following the Fed. Bank of Singapore notes that the Fed has not yet finished fighting inflation, so it is too early to enter USD sales.

Weekly EURUSD trading plan

The EURUSD growth to the upper limit of the consolidation range of 0.98-1.01 suggests that it is already possible to start selling the euro, but I would advise waiting for the release of the US inflation data.

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