USD hopes for tail risks. Forecast as of 06.01.2023

Pessimists have dominated Forex in recent years, which is not surprising given the recent events in the global economy and geopolitics. Perhaps 2023 will become a bright beacon of hope. Let’s discuss this topic and make up a trading plan for EURUSD.

Quarterly US dollar fundamental forecast

Forecasts are a thankless thing. No one will praise you when you hit the bull’s eye, as if it should be so. However, when you make a mistake, everyone gets indignant. Nevertheless, interest in expert forecasts is great because if they are implemented, it is possible to earn good money. For three of the last four years, traders have only made money thanks to pessimistic EURUSD forecasts. Let’s see what happens this time.

According to the Bloomberg survey, the most bearish forecasts were $1.1 for 2019, $1.15 for 2021, and $1.05 for 2022. All of them were close to reality. At the same time, the consensus estimates had nothing to do with the real numbers. Curiously, during the pandemic in 2020, optimistic forecasts were profitable. Optimists are betting on 1.15 at the end of 2023, while their opponents expect the pair to decline to 0.97. The median forecast is 1.08.

It was very difficult to predict excessively high inflation at the end of 2021 and the war in Ukraine in 2022. If the outbreak of COVID-19 had happened not at the beginning but in the middle or end of 2020,  EURUSD dynamics could also be completely different. As a result, the enormous scale of cheap liquidity from the Fed to save the collapsed economy inflated the demand for risk and became a catalyst for the USD weakening.

If nothing extraordinary happens in 2023, the actual performance will be closer to the consensus estimate or the bulls’ opinion. The Fed is ending its monetary tightening cycle, while higher European inflation forecasts suggest that the ECB will raise rates longer than the US central bank. Most are already expecting a recession. However, it started in the eurozone, which has already been priced in quotes. But not in the US, which is bad for the dollar. The USD has not yet felt the full negative impact of the destruction of American exceptionalism.

What can go wrong? What are the tail risks? The fall in gas prices in Europe to pre-war levels suggests that the inflation slowdown in the currency union may occur faster than expected. This will tie the ECB’s hands. On the contrary, US inflation may begin to grow against the backdrop of a strong labor market and high prices in the service sector. In this scenario, EURUSD may fall to the zone of 1.03-1.04, if not lower. Will the pessimists take over again?

EURUSD trading plan for a quarter

I hope this doesn’t happen. Most likely, EURUSD will fluctuate a lot. I expect it to fall to 1.04 and then recover to 1.1 by the end of the year. However, this requires a strong labor market and accelerating inflation in the US. Whether the first parameter will come true will be known at the end of the first week of January. Strong nonfarm payroll data and average wages will make it possible to add up to EURUSD short trades entered at the level of 1,061.

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