USD: last hike or not? Forecast as of 23.03.2023

Is the ninth federal funds rate hike the last, or is another one planned? In any case, the Fed’s monetary tightening will no longer please the EURUSD bears. Let’s discuss this topic and make up a trading plan.

Quarterly US dollar fundamental forecast

All things come to an end. Both good and bad. The most aggressive monetary tightening cycle was bad for the economy, which gradually cooled and began to falter. It was good for the US dollar. Thanks to higher bond yields and a decrease in global risk appetite, USD has reached a 20-year high. Now everything has changed. The economy should find the optimal level, and the greenback should fall. Thus, the EURUSD rise in response to the Fed’s verdicts is only the beginning of the rise.

Despite the ninth consecutive increase in the borrowing cost to 5%, investors received many signals about the imminent end of the monetary restriction cycle. The repeated warning “that permanent rate hikes would be necessary to bring inflation under control” was removed from the accompanying statement. Instead, Powell said, “we will eventually get to tight enough policy to bring inflation down to 2%”.

Jerome Powell said FOMC officials were considering not raising rates. The Fed chairman also hinted that March’s rise in borrowing costs could be the last, depending on the extent of any lending pullback that will follow the massive withdrawal of funds from banks. Estimates that lending pullback will lead to lower hiring, economic activity, and inflation are empirical, but Fed officials think it’s possible. Therefore, it is necessary to be vigilant when moving ahead.

FOMC forecasts the imminent end. Their predictions haven’t changed much since December. Officials expect the federal funds rate to rise to 5.1%, which suggests that the process is either over or +25 bps is expected soon.
Despite the fact that the central bank does not expect a decrease in the borrowing cost before 2024, the idea of a dovish reversal in 2023 is relevant again. A record yield curve inversion signals a recession and monetary policy weakening. In March 2022, Jerome Powell called it (the difference between the expected 3-month bill rate and the current rate) the most accurate indicator of an approaching recession.

The situation returned to the beginning of the year when hopes for a slowdown and an early end to the Fed’s monetary restriction cycle, and a dovish reversal pushed EURUSD up. If we add to this the improvement in the eurozone economy, the ECB’s determination, and the potential acceleration of China’s GDP, it becomes clear that a full recovery of the EURUSD uptrend is a matter of time.

Quarterly EURUSD trading plan

In such a situation, the best strategy is to buy the euro against the US dollar on the correction. The first of two previously set EURUSD longs targets at 1.09 and 1.1 yielded profits very quickly. It would be reasonable to raise them to 1.12 and 1.14.

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