The upcoming presidential election in France, new sanctions against Russia, and fears that the Fed’s aggressive balance sheet unwinding would trigger a taper tantrum similar to that of 2013, press down the EURUSD. What’s next? Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
The euro is going down and should close the seventh consecutive trading session against the US dollar in the red. It would seem that the EURUSD should continue consolidating in the range of 1.089-1.116 as most of the positive drivers for the greenback have been priced. However, the euro bears git new drivers able to push the pair below the consolidation range and resume the downtrend.
The long-term EURUSD bearish trend is based on the divergence in monetary policy and economic growth, as well as the high demand for safe havens amid growing geopolitical risks. The 225-basis-point Fed’s rate hike in 2022 has been priced in the market, and the euro should have stabilized. However, James Bullard argues that the central bank should fight inflation, although it does not want to cause turmoil in the financial markets. According to the President of the St. Louis Fed, the rate should reach 3%-3.25% in the second half of this year.
Nonetheless, Bullard is the main Fed hawk, he was the only one to vote for a big move in March. Chicago Fed President Charles Evans and Atlanta Fed President Raphael Bostic provided a somewhat dovish counterpoint, sticking to the dot plot, according to which the federal funds rate should be at 2% by the end of 2022.
After all, the rise in the borrowing costs by half a point in May and further aggressive monetary tightening have been priced in the dollar pairs. However, the greenback got a new advantage! The Fed is willing to unwind the balance sheet fast and aggressively by more than $1 trillion a year. And that is equivalent to three or four rate hikes by a quarter of a point each in 2022-2023. The Treasury yield should continue rallying up, supporting the US dollar.
At the same time, the euro got new bearish drivers. Even though opposition leader Marine Le Pen is not as radical as in 2017 when she demanded almost France’s exit from the euro area, her ideas will slow down the integration processes. According to Nomura, the victory of Euroskeptics in the presidential elections in late April will send the EURUSD down to 1.05. If they seize power in parliament in early summer, the pair could reach parity. Although Emmanuel Macron is still more likely to become the French president, investors have to hedge against the euro risks.
Weekly EURUSD trading plan
If we add to the Fed’s balance sheet unwinding and the growth of political risks in France, the risks of further EU sanctions against Russia, which will negatively affect the euro area economy, the EURUSD drop over the last seven Forex trading sessions looks natural. If the pair doesn’t consolidate in the range of 1.084-1.088, it will continue falling to 1.072 and 1.065. The rebound up from the convergence zone will allow selling the euro on the price rise.