USD: slow down or not? Forecast as of 02.11.2022

The Fed wants to cool the economy, not freeze it up. In this regard, the slowdown of monetary tightening looks reasonable. How will the financial markets react to this? Let’s discuss the topic and make up a trading plan for EURUSD.

US dollar fundamental forecast for today

The Fed continues to push the US economy into recession. Investors are convinced that the federal funds rate will be raised by 75 bps to 4% at the FOMC meeting on November 1-2. However, they are much more interested in whether Jerome Powell signals a slowdown in the rate of monetary restriction in December. This event could become the trigger for the EURUSD rally.

In September, the Fed’s chairman claimed he was ready to sacrifice the economy to defeat inflation. Little has changed since then. The labor market is still strong, and core inflation continues to rise. Still, domestic demand is slowing down, and the real estate market has declined. Isn’t this the kind of pain Jerome Powell is talking about? Most Bloomberg experts continue to believe in the Fed’s resolute stance.

Historically, if the central bank hit the brakes too soon, it ended badly. Does anyone believe that raising the rate to 4.5% can bring inflation exceeding 6% back to the 2% target?

On the other hand, the Fed intends to cool but not freeze up the economy. +50 bps is fast, but +75 bps is very fast. Monetary restriction operates with a time lag. Thus, the consequences of the most aggressive rate hike in decades could lead to sad consequences. The ideal time to slow down the rate of monetary restriction is December. It is only necessary to add half a point to the borrowing costs and indicate a higher ceiling in the forecasts than the previously expected 4.6%. This will mean that the start of the slowdown will be delayed, and there will be more smaller steps by the Fed.

This approach looks reasonable, so Citigroup, JP Morgan, Goldman Sachs, Morgan Stanley, and Wells Fargo vote for it. But how can Jerome Powell correctly signal a slowdown in monetary restrictions so as not to unsettle financial markets? Investors crave for the Fed’s dovish reversal, although the central bank has punished them three times in the past three months for a false start.

The market reaction in the form of a stock index rally, falling Treasury yields, and a weakening US dollar is still not included in the Fed’s plans. This makes financial conditions less tight, making it harder to fight inflation. Therefore, Fed’s resolute position will be maintained, which will strengthen the greenback. According to 22 out of 40 Reuters experts, the USD index will again hit recent highs. Eight experts believe that the USD will update them.

EURUSD trading plan for today

USD’s fate depends on Fed. If investors see signs of a dovish reversal in Jerome Powell’s speech, EURUSD will soar above 0.995, making the purchases reasonable. On the contrary, if the Fed remains resolute, enter sales when the price falls below $0.985.

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