Considering the response of the markets to the outcomes of the FOMC March meeting, the factor of the Fed’s aggressive monetary tightening has been priced in the EURUSD quotes. Does it mean that we should buy the pair? Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
In late March, financial markets look stable. The US stock indexes featured the best weekly since November 2020, while gold and oil were trading down. Even such an event, expected by investors, as the first increase in the federal funds rate since 2018, went almost unnoticed. The markets seem to have been prepared for the start of monetary tightening, so they ignored it. The events in China, Ukraine, and Russia may have drawn investors’ attention. However, there is another reason for the EURUSD stability, which looks extraordinary.
The dollar doesn’t strengthen, despite a more than aggressive FOMC forecast for the federal funds rate, which looks surprising. Seven rate hikes in 2022 and another three or four ones in 2023. Furthermore, 7 of the 16 members of the Committee are ready to tighten monetary policy at an even faster pace. St. Louis Fed President James Bullard argues that the Fed should bring the borrowing costs to 3% already this year to curb inflation and not to lose investors’ confidence. Christopher Waller says that but for the need to be cautious amid geopolitical tensions, he would have voted for a half-a-point rate hike.
Thus, despite a kind of hawkish surprise from the Fed and the calls of supporters of monetary tightening, the US dollar doesn’t soar. Furthermore, the EURUSD has been up in response to the outcomes of the FOMC meeting. What’s the matter? I see two reasons. The first is a drop in volatility, which is interpreted as lowering uncertainty. The epidemiological situation in China improves, China is not willing to support Russia in the conflict with Ukraine, and Turkey, a mediator in the negotiations between Moscow and Kyiv, declares that the parties are moving towards a compromise. The volatility in different markets decreases as well as the demand for safe havens, primarily for the US dollar.
The second reason is associated with the principle “buy the news, sell the facts.” As history would suggest, the greenback rose about 7% in the nine months before the first federal funds rate hike, and it weakened by just over 4% on average during the previous four monetary tightening cycles. According to old patterns, investors should sell the dollar.
Weekly EURUSD trading plan
However, the US dollar has two more strong advantages. First, a faster rate hike by the Fed, by 50 basis points at the next FOMC meetings. Secondly, the escalation of the conflict in Ukraine. If at least one of them is activated, it will be relevant to sell the pair on the rebound from the resistances at 1.111 and 1.107. In the general, I bet on the EURUSD consolidation in the range of 1.085-1.125 and suggest selling the pair on the rise or buying on the fall.
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