USD: quantity will not turn into quality. Forecast as of 01.06.2023

No matter how many FOMC officials favor raising the federal funds rate, the final decision is made collectively. If top Fed officials insist on a pause, it is likely to happen. Let’s discuss this topic and make up a trading plan for EURUSD.

Weekly US dollar fundamental forecast

After numerous comments from FOMC officials about additional Fed rate hikes, derivatives raised the possibility of such a move at the June Fed meeting above 60%. However, the hints of the new Fed Vice President Philip Jefferson about a pause in monetary restriction cooled the enthusiasm of EURUSD bears. Most likely, the number of hawkish speeches will not grow into quality. The rate will remain in place, which is good for the euro.

EURUSD collapsed to a 9-week low as eurozone inflation slowed and job openings increased in the US. The growth rate of consumer prices in Italy decreased from 8.7% to 8.1%, in France from 6.9% to 6%, and in Germany from 7.6% to 6.3%. Together with the fall of the Spanish indicator to a two-year low, this increases the possibility of a serious inflation slowdown in the eurozone.

At the same time, the chances of reaching the 4% deposit rate are falling. The ECB’s tightening cycle will likely end in July after two borrowing costs increase by 25 bps to 3.75%. This deprives EURUSD of an important advantage.

The increase in US vacancies in April from 9.75 million to 10.1 million adds bonuses to the US dollar. The ratio of vacancies per unemployed is 1.8. This is not as high as in March 2022. However, if you forget about the pandemic and the subsequent economic recovery, this is the strongest indicator since 1951. The labor market is still robust, which allows the Fed to continue the monetary restriction cycle.

To the disappointment of the EURUSD bears, Philip Jefferson believes that not raising the rate in June will allow the central bank to get more data. This will help assess the need for continued monetary tightening. At the same time, the decision to keep the borrowing cost at 5.25% should not be perceived by the markets as the end of the cycle. Investors immediately remembered that Jerome Powell also mentioned the pause. If top FOMC officials are set to pause, they will do what they have planned. The chances of a rate hike in June declined to 30%, and the major currency pair managed to reach the bottom.

It is also worth noting that Philadelphia Fed President Patrick Harker suggests skipping every second FOMC meeting, including the June one.

Weekly EURUSD trading plan

Thus, the situation on the eve of May’s important US employment report has changed radically. Until the latest comments from Fed officials, USD would have strengthened due to figures close to forecasts. Now this requires very strong data. The chances of this are small. Therefore, after taking profits on EURUSD short trades around 1.0665, switch to considering purchases on the breakout of resistance at 1.0715 and 1.0735.

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