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The Federal Reserve can afford to either cut rates more than expected or keep them at a plateau longer than expected. The regulator’s further actions will depend on the cooling of the US economy and the acceleration of inflation. Let’s discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
Wait and see. According to Jerome Powell, this is the Fed’s position. There is no point in cutting rates right away. The US central bank can ease monetary policy more than expected if the US economy slows significantly. Conversely, it can keep borrowing costs at a plateau if inflation continues to accelerate. In chess parlance, the Fed is in a strong position – just like the EURUSD bears.
Jerome Powell’s cautious tone might have spooked sellers of the US dollar, but his phrase, meaning that it’s good to see things live up to expectations, suspended the EURUSD downtrend. If the acceleration of the personal consumption expenditure index from 2.4% to 2.5% does not bother the Fed, the risks of a smaller scale of monetary expansion might be exaggerated.
Dynamics of US inflation
Source: Bloomberg.
But is Jerome Powell’s emphasis on caution an attempt to mask concerns about a potential acceleration in consumer prices? These risks are higher in the United States than in other countries. This is due to a faster increase in productivity, a strong economy, in which, as a rule, there is no weak inflation, rising oil prices, and the activities of the central bank. With its dovish shift and constant talk of rate cuts, the Fed has triggered a rally in stock indexes and loosened financial conditions, which creates a favorable environment for accelerating CPI and PCE.
The situation is different in Europe, where weaker French and Italian consumer price data than Bloomberg forecasts has forced Governing Council officials to turn dovish. According to the governor of the Bank of Greece, Yannis Stournaras, the ECB will reduce the deposit rate four times in 2024 by a quarter point at each meeting. The derivatives market expects three rate cuts, so if the official’s forecasts come true, EURUSD risks falling even deeper.
Thus, the weak euro-area economy forces the ECB to hurry up. On the contrary, the US exceptionalism allows the Fed to be patient. This difference in views gives confidence to USD bulls.
What’s next? Jerome Powell answered this question very clearly. If the US economy begins to cool, expect a rate cut soon. And the best indicator is the US jobs market. Bloomberg experts predict employment growth of 200,000 in March, unemployment of 3.9%, and a slowdown in wages to 4.1%, which will be the slowest growth rate since mid-2021.
Dynamics of US employment
Source: Bloomberg.
Weekly EURUSD trading plan
Of course, these are not the numbers that will force the Fed to ease monetary policy right away. However, if actual data turns out to be significantly worse than expected, investor interest in buying the US dollar will sharply fade, pushing EURUSD up. For now, the major currency pair is trying to return above 1.08. I suggest selling the euro as it grows. If the euro doesn’t grow, it will still be relevant to sell it in the direction of 1.07.
Price chart of EURUSD in real time mode
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