USD dictates terms. Forecast as of 18.04.2022

Investors talk about a recession likely to start in Europe or Asia. At the same time, the strength of the US economy supports the EURUSD bears. Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental analysis

A strong economy means a strong currency. The dominance of the US dollar in Forex is another proof of this judgment. The labor market is the toughest in decades. Employees are not afraid of being fired because they can easily find a new job. Consumers have accumulated large sums of money thanks to massive fiscal stimulus. These factors convince FOMC officials that the US economy can withstand any tightening of monetary policy. Why is the recession being discussed in the market?

After 11 of the 14 Fed monetary restriction cycles, economic recession followed within two years, but only eight cycles could be somehow connected with the central bank’s activities. Its officials desire to avoid a recession. According to the consensus forecast of Bloomberg experts, the chances of its beginning have increased from 20% in March to 27% in April over the next 12 months. Goldman Sachs estimates the chances of a recession in the next two years at 35%.

According to Bloomberg, the combined impact of the armed conflict in Ukraine and COVID-19 leads to low economic growth, high inflation, and uncertainty. For a recession to start, new shocks are needed. Possible catalysts could be the refusal of oil and gas supplies to Europe and (or) the spread of COVID-19 in most China.

Thus, the future global GDP decline could start in Europe or Asia while the US economy continues to look strong. Actively growing Treasury yields support the USD. The government bond index fell 5.5% in the first quarter, the worst result since 1980. In April, it fell by another 2.4%. Rates on 10-year bonds are approaching 2.9%. Investors are getting rid of debt, believing in the strong US economy, accelerating inflation, and the Fed’s intention to stop it.

Bloomberg predicts that the Fed will raise rates at every FOMC meeting in 2022. Most likely, at one of the meetings in May, borrowing costs will be immediately increased by 50 basis points. The futures market expects them to reach 3% in 2023. According to Penn Mutual Asset Management research, reaching 3.5% could cause the S&P 500 to fall by another 10%.

Weekly EURUSD trading plan

As I noted earlier, the rally in Treasury yields and the fall in US stock indices create favorable conditions for EURUSD bears. Jerome Powell’s speech at the meeting of the IMF and the World Bank at the end of the week ending April 22 may strengthen the monetary restriction. Expectations of hawkish statements by the Fed’s chairman will support the USD at the beginning of the week. Continued pressure on the euro due to expectations of the second round of the presidential elections in France, the escalation of the conflict in Ukraine and the EU’s accession to the embargo on Russian oil will contribute to EURUSD sales in the direction of 1.072 and 1.065.

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