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At the end of an excellent quarter for EURUSD bears, there is a high risk of profit-taking on shorts and the pair rebounding up. The publication of PCE data and Jerome Powell’s speech could support the euro. Let’s discuss the Forex outlook and make up a trading plan.
Weekly Euro fundamental forecast
The hawkish stance of FOMC member Christopher Waller, who called for putting off the start date of the Fed’s monetary easing to a later period and reducing its scale, sent the EURUSD down below 1.08 for the first time in five weeks. However, it is clear that there is a split within the central bank, and Jerome Powell will have the final say. Investors are looking forward to his speech at the end of March, as well as the report on PCE.
The USD index should close the first quarter with a result of +2.6%, the best since the third quarter of last year. The greenback is generally considered a safe-haven currency, so its success amid a 10% rally in the S&P 500 may cause some confusion. In fact, the upward movements in both assets result from American exceptionalism—a strong economy, soaring productivity growth, and artificial intelligence technology.
Quarterly dynamics of USD
Source: Bloomberg.
Unsurprisingly, the fourth-quarter US GDP revision from 3.2% to 3.4% and the University of Michigan Consumer Sentiment Index soaring to its highest level since mid-2021 resulted in the S&P 500 22nd record high and EURUSD drop below 1.08.
Furthermore, the divergence in economic growth still affects the market pricing, especially since ECB officials constantly emphasize the vulnerability of the euro area economy. Thus, the governor of the Bank of France, François Villeroy de Galhau, said that the ECB should not ignore the economic risks associated with keeping deposit rates at the 4% plateau for too long. In order to achieve the secondary goal of a soft landing, the central bank is required to ease monetary policy at one of its two next meetings, in April or June.
According to another member of the Governing Council, Fabio Panetta, tight monetary policy is compressing demand and, along with falling energy prices, is pushing inflation closer to the 2% target. This pushes the ECB to start monetary easing.
There is an opinion that the Swiss National Bank’s rate cut and the dovish tone of the Bank of England and Riksbank could push the ECB to dramatically outpace the Fed in easing monetary policy. This circumstance is pushing the EURUSD price down.
One reason for the dollar’s synchronous trend with the S&P 500 may be a drop in forex volatility. Even though the euro is less used by carry traders as a funding currency than the yen or franc, the US-German yield spread allows making good money by playing on the difference. Euro volatility is approaching 6.6%, the lowest level since November 2021. A year ago, it was 11%.
Dynamics of euro volatility
Source: Bloomberg.
Weekly EURUSD trading plan
Will PCE data and Jerome Powell push the EURUSD up? It is quite possible due to profit-taking on shorts. However, the pullback should, in any case, be used for sales with a target of 1.07.
Price chart of EURUSD in real time mode
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