The Fed must perform a feat to keep the US economy from falling into recession. Previously, the regulator failed to reduce inflation so much without a recession. Will it work this time? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental analysis
It’s better to look back and regret the things you did rather than the things you didn’t do. Over the past 80 years, the Fed has never managed to bring inflation down by the 4% required today without triggering a recession. The most successful example is 1994, when the central bank, led by Alan Greenspan, managed to avoid a recession despite raising the rate from 3% to 6%. The main difference is that the Fed acted ahead of the curve back in the day, but now it is catching up with inflation that has accelerated greatly. Whether the Fed succeeds in accomplishing the feat will depend not only on the regulator but also on factors beyond its control. Janet Yellen thinks it will take some luck.
FOMC officials like to refer to 1994 as the best example. So James Bullard said that Alan Greenspan’s rate hike by 75 basis points at one of the Committee meetings did not become an obstacle to the subsequent 10-year expansion of US GDP. However, this is not a basic scenario for the St. Louis Fed’s president. He would prefer several 50 basis point increases in borrowing costs to bring them to 3.5% already in 2022.
Such hawkish speeches by the Fed officials have been so frequent lately that investors are tired of them. The desire of hedge funds to sell the USD on the facts after buying it on rumors of aggressive monetary restriction was so great that in the week ending April 12, they added up to their long euro trades to the highest level in 5 weeks. All this happened on the eve of the ECB meeting, where everyone expected a hawkish surprise. However, it didn’t happen. Christine Lagarde emphasized the huge difference in monetary policy, which provoked massive sales of EURUSD.
The euro has too many vulnerabilities to expect a downtrend breakout or a serious strengthening against the US dollar. Fears of an escalation of the armed conflict in Ukraine add to the uncertainty in connection with the second round of the presidential elections in France. The Ukrainian conflict was the main factor that influenced the reduction of the World Bank’s forecasts for global GDP for 2022 from 4.1% to 3.2%. As a rule, when the global economy outperforms the US one, EURUSD rises. In the opposite case, the pair goes down.
The US securities market is helping the greenback. There a rally in Treasury yields and falling stock indices take place. The continued decline of Treasuries is surprising, as rates have already risen to levels attractive to pension funds and foreign governments.
Weekly EURUSD trading plan
The Fed does not intend to reduce the aggressiveness of monetary restriction, and hedge funds made a mistake by buying the euro ahead of time. EURUSD bulls have a lot of vulnerabilities, while the US dollar enjoys a favorable environment. All these facts contribute to the fall of EURUSD in the direction of 1.072 and 1.065. The update of the April low can become a catalyst for this process and allow traders to add up to the previously formed short trades.