USD faces obstacles. Forecast as of 01.11.2022

Unlike Donald Trump, Joe Biden does not criticize the Fed. However, high inflation and the looming recession may prevent the Democrats from winning the midterm elections. Let’s discuss the topic and make up a trading plan for EURUSD.

US dollar fundamental forecast for today

On the one hand, investors understand that the 14% rally of the Dow Jones index in October, the best since 1976, was excessive. Expecting a dovish reversal by the Fed, the markets have been wrong more than once and paid dearly for it. The Fed may punish them again at the November FOMC meeting. On the other hand, pressure on the US regulator is also increasing from politicians. The change in Jerome Powell’s stance could be a saving straw for the EURUSD.

Unlike Donald Trump, Joe Biden has openly stated that he will not criticize the Fed. The current US president respects the independence of the central bank. However, times are changing. It’s one thing when everything goes well. Another is when the highest inflation in decades and a looming recession anger voters. This could end badly for Democrats in the Nov. 8 midterm elections. Therefore, some of them urge Jerome Powell to show restraint.

Especially since the key yield curve, with the difference in rates between 3 and 18-month bills, is ready to be inverted. The Fed chairman was once skeptical about bond yield differentials falling below zero with other maturities, citing this curve. Now it is close to signaling an imminent recession.

The slowdown in some inflation indicators, the increase in political pressure, and the understanding that monetary restriction affects the US economy with a time lag may force the Fed to change its stance. Signs of a slowdown in rate hikes will contribute to the EURUSD strengthening.

The EURUSD fall before the FOMC meeting is the result of both fear of the remaining resolute Fed and stagflation in the eurozone. In October, consumer prices in the currency bloc reached a new historical high of 10.7%. This indicator sets records for the 12th month in a row. In the third quarter, GDP sank by 0.2%. The combination of the highest inflation in the eurozone’s history and the slowdown in economic growth clearly shows stagflation. It makes investors doubt that the ECB will act boldly and the EURUSD will decline.

Even the hawkish head of the Bank of the Netherlands, Klaas Knoth, announced a 50 bps increase in the deposit rate in December. Isn’t this a sign of a dovish reversal by the ECB?

EURUSD trading plan for today

Will the Fed keep resolute or change its stance? This can provoke serious EURUSD fluctuations. The pair rebounded from the bottom of the zone of 0.988-1.008, allowing traders to enter long trades. However, I have to warn them. The markets are waiting for the Fed’s verdict, and on the eve of an important event, the best solution is to remain out of the market.

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