USD will signal. Forecast as of 03.05.2023

Investors believe that May federal funds increase will be the last. But the final decision will be made by the Fed. Can Jerome Powell give the right signal? How will this affect the markets? Let’s discuss this topic and make up a trading plan for EURUSD.

Weekly US dollar fundamental forecast

How will the Fed signal that one of the most aggressive monetary restrictions in over 100 years is over? Markets expect a 25 bps federal funds rate increase to 5.25% with a probability of 87%. They believe it will be the last in the cycle and predict a decrease in the borrowing cost in 2023. However, EURUSD is actively fluctuating, which indicates investors’ uncertainty in the above estimates.

Anything is possible in this world. However, the refusal of a rate hike is unlikely. On paper, this could lead to an S&P 500 rally. The index typically rises after the Fed’s monetary tightening cycle ends. In practice, this will scare the markets and show that the Fed is seriously concerned about the banking crisis. The best solution is to do what investors want. Raise the borrowing cost by a quarter point and show the willingness to pause. But how?

Perhaps Jerome Powell and his colleagues will do the same as in 2006. That year, their predecessors, ending the cycle, reported that the extent and timing of any additional rate hike would depend on changes in inflation and economic growth prospects. Seventeen years ago, the borrowing cost also stopped at 5.25%. However, inflation was significantly lower than now.

In fact, fundamental analysts are not much different from technical ones. Both are trying to predict the future using past patterns. Both of them make mistakes. Conditions may vary significantly.

USD buyers blame the decline in G10 currencies’ volatility to the critically low levels that the indicator targeted in 2022, which led to a USD strengthening. However, the current situation has nothing in common with last year. Then the Fed aggressively tightened monetary policy, and now it is ending the cycle.

Capital Economics notes that the US dollar has strengthened using its safe-haven status in all but one recession over the past 40 years. Alas, but now the greenback has lost that status. The euro performs this function much more effectively as investors doubt the US economy’s stability.

The markets’ reaction to the disappointing US jobs report confirmed their doubts. The decline in vacancies to 9.6 million in March (the lowest level in almost two years) and the increase in layoffs from 1.6 million to 1.8 million led to the S&P 500 and treasury yields’ drop and the return of EURUSD above 1.1.

Weekly EURUSD trading plan

Despite false breakouts, trading in 1.0975-1.1055 is still relevant. As well as the strategy of EURUSD purchases in case of a breakout of its upper border and selling in case of a successful test of the lower one.

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