The Fed is still focused on inflation, although the central bank’s officials talk about a dual mandate and emphasize the strength of the labor market and the US economy as a whole. Therefore, the release of CPI data is a test for EURUSD. Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
The market is waiting for bad news, but it doesn’t come. As a result, investors have become fearless. They have sent the S&P 500 up to its 10th record close since the start of the year. The broad stock index has risen in 14 of the last 15 weeks, a feat not seen since the 1970s. Coupled with expectations of a slowdown in US inflation, the rally indicating an improvement in global risk appetite is leading to a pullback in EURUSD.
Although the Fed is talking about its dual mandate, it is still focused on inflation. Comments by FOMC officials suggest that even current progress in CPI and PCE trends will be enough to lower the federal funds rate. They turn a blind eye to both the strong economy and strong US jobs reports, arguing that monetary policy will be eased at some point in 2024. And the markets believe the Fed.
At the end of last year, derivatives signaled six federal funds rate cuts over the next 12 months and did not rule out a seventh one, but now, it is expected four rate cuts with some possibility of a fifth. This change in market outlook has allowed the US dollar to close five of the last six weeks in the green.
According to JP Morgan, the greenback will continue to strengthen as strong economic growth and US exclusivity continue to support it. The Fed’s dovish shift and federal funds rate cut are not the reasons for buying the EURUSD, as monetary easing cycles in the US and elsewhere are deeply synchronized. At the same time, Donald Trump’s solid results in the Republican primaries point to the November elections in the United States as an important risk factor and support for safe-haven assets.
Of course, selling the US dollar is too early, but if inflation in the US continues to slow down, the market will return to the idea of the Fed starting monetary easing in March, which will weaken the greenback. In this regard, the release of January CPI data naturally attracts the attention of investors. Bloomberg experts suggest a slowdown in consumer prices from 3.3% to 3% and core inflation from 3.9% to 3.8% Y-o-Y. Will these numbers be enough for the Fed to act?
In any case, the US dollar faces a difficult test. It is not surprising that investors prefer to play it safe and exit EURUSD shorts, which results in an ascending correction. The correction risks intensifying due to buying the news, followed by selling the facts. On the contrary, if the investors choose caution, the pair will consolidate.
Weekly EURUSD trading plan
Thus, I will not trust the EURUSD rise in case the price breaks out the resistances at 1.0795 and 1.0805. Following false breakouts of these levels, the pair should be consolidating in the short term. I won’t recommend entering any trades right now.
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