USD: without black swans. Forecast as of 26.01.2023

Divergence in economic growth continues to support the EURUSD bulls. If the outlook for the eurozone improves, a recession is likely to begin in the US. Let’s discuss this topic and make up a trading plan.

Weekly US dollar fundamental forecast

When the situation in the European economy improves, and in the US, on the contrary, it worsens, the EURUSD pair confidently moves to the previously designated target of 1.095. The German government claims that the recession will be shorter and milder (if it starts at all) and raises the GDP forecast for 2023 from -0.4% to +0.2%. Therefore, Bloomberg experts no longer expect the eurozone economy to shrink this year.

In the USA, the situation is different. In 2022, US GDP grew faster than the rest, which was one of the three key drivers of the USD index rally. In 2023, a recession is expected to hit the US. The new recession will be one of the most anticipated in history, unlike the previous two, which were the result of the Black Swan events, the mortgage crisis and the pandemic. Actually, everything goes according to the rules. The Fed is tightening monetary policy in the most aggressive way in decades, domestic demand is falling, GDP is shrinking.

However, not everyone is sure about the decline. While industry and the real estate sector are already in recession, but, the labor market is very strong. The GDP data for the fourth quarter may raise questions. If consumer activity turns out to be higher than expected, the US economy may present a pleasant surprise in the first half of 2023.

However, its global counterparts may disappoint financial markets. More than 500 Reuters experts unexpectedly lowered forecasts for 2023 and 2024 from 2.3% to 2.1% and from 3% to 2.8%, respectively. More than 85% of respondents consider the monetary tightening and the high inflation to be the main threats to global GDP.

Indeed, if monetary restriction affects the economy with a time lag, and its consequences will manifest more and more, then the current market euphoria will look excessive. The markets are focused on a rapid inflation slowdown, but what if this is not the case? The 20% rally of the MSCI index from the October lows has been too long, as has the EURUSD rally. Isn’t that the point?

In the next few days, it will be decided whether the pair will correct from the current levels or first reach 1.095. The bulls have another short-term advantage. If the base PCI grows by 4.4% expected by Bloomberg experts, and not by 4.8% in accordance with FOMC forecasts, then there will be no need to raise the federal funds rate to 5.1%.

Weekly EURUSD trading plan

Before the first Fed meeting in 2023, the risks of EURUSD consolidation were growing. Therefore, even if the pair grows to the zone of 1.095-1.0985, a rebound will follow. After that, taking part of profits on long trades will be reasonable.

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