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Exiting the EURUSD shorts sent the euro up. However, the US exclusivity and the Fed’s hawkish stance compared to other world’s central banks will support the US dollar. Let us discuss the Forex outlook and create a trading plan.
Weekly US dollar fundamental forecast
The dollar will hardly drop deep when the Fed seems more hawkish than other world’s central banks. Furthermore, the US economic expansion outperforms other advanced economies. Convergence in monetary policy and US exceptionalism encourage the EURUSD bears, and the pair’s current recovery is because investors are exiting the euro shorts to take the profit. Ultimately, Fed policy depends on data, and no one knows what exactly the statistics will be.
The strong start of the US economy in the new year has significantly increased the number of optimists in the market. Just 6 months ago, Bloomberg experts predicted that US GDP in 2024 would expand by a modest 0.9%, and employment would grow by 35 thousand per month. The probability of a recession was estimated at 55%. However, due to the strong labor market and the associated increase in consumer spending, the forecast for economic growth was raised to 2.2%, and the chances of a downturn fell to 35%.
Forecasts for US economy
Source: Bloomberg.
Experts expect the Fed to cut the federal funds rate just two times in 2024, which is less than market and FOMC forecasts. In March, 10 members of the Committee expected three acts of monetary expansion, 9 – two or less this year. The latter include Lisa Cook, who called for caution, and Atlanta Fed President Raphael Bostic. He said he voted for one cut in borrowing costs and that the central bank needs to be patient.
On the contrary, Chicago Fed president Austan Goolsbee is confident that three rate cuts are required since the Fed needs to find a balance between its dual mandate – to anchor inflation at 2% and prevent a sharp rise in unemployment.
Essentially, the central bank does not want to push the US economy into recession. The regulator is frightened by the fact that if PCE falls to 2%, real rates will be at 3.5%. History shows that recessions have occurred when the rate is 3% or higher. Another risk factor is the yield curve breaking out of inversion, which has also served as a signal of an approaching recession in the past. Perhaps the downturn was simply postponed?
Dynamics of US yield curve
Source: Bloomberg.
In fact, history shows that the Fed began cutting rates in response to a weakening economy, including in response to a recession, and not because benchmark indicators were sending scary signals. If US economic data remain strong, it is unlikely that the central bank will take active steps. The risks of a return to high prices are too great. The Federal Reserve does not want to make the same error as in the 1970s. It is too early to declare victory over inflation, return to monetary restriction, and drive the economy into a double-dip recession.
Weekly EURUSD trading plan
In such a situation, the rebound of EURUSD from 1.08 is seen as a result of large players profit-taking on shorts. It is most likely of a technical nature. Therefore, the rebound of the main currency pair from the resistances at 1.085 and 1.088 should be used for sales.
Price chart of EURUSD in real time mode
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