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When the US economy cools down and inflation falls to target, the Fed can cut rates with a clear conscience. As the central bank is rumored to cut earlier than expected, the dollar feels pressured. Let’s discuss it and make a trading plan for the EURUSD.
Weekly fundamental forecast for dollar
The February US labor market report revived the idea of a soft landing for the US economy. It is cooling down, but not strongly enough for the risks of a new inflation boost to grow. The Fed can cut rates with a clear conscience. At the same time, Bloomberg forecasts a rate cut as early as May, an earlier date than expected. Let me remind you that the consensus opinion presumed that monetary expansion will start in June. Thus, the EURUSD’s best week in 2024 is no surprise.
Euro/dollar weekly evolution
Source: Bloomberg.
In February, US non-farm payrolls grew by 275 thousand, exceeding Bloomberg experts’ forecasts of 200 thousand. However, data for the previous two months was revised downwards by 167 thousand, creating a so-called Goldilocks environment alongside unemployment growth to 3.9% and a drop in the wage growth pace to 0.1% m/m and 4.2% y/y. The economy slows but continues to expand above trend; inflation is steadily headed for the Fed’s target of 2%.
At first glance, the stock market’s fall and the EURUSD’s pullback from a two-month high look strange, but everything is natural. Stock indices have recently hoped for a new rise in the US economy instead of a soft landing. Moreover, investors decided to play it safe before the release of US inflation statistics and locked in profits on longs.
Bloomberg experts expect consumer prices to continue growing at 3.1% and core inflation to slow down from 3.9% to 3.7% y/y. The Fed, which will publish a new Fed funds rate forecast in March, will be satisfied with such data. The forecast will likely be the same as in December: borrowing costs are expected to be cut at the FOMC’s three meetings in 2024. However, if February inflation comes as a surprise, the Fed may change its mind as it is sensitive to inflation data.
American labor market stats have been good news for the central bank and the EURUSD. The cooling of the US economy is a fundamentally important signal for the main currency pair. The divergence in the United States’ and the eurozone’s economic growth forecasts has not been so wide for a long time.
US and German GDP forecast trends
Source: Reuters.
If US GDP estimates decline and European estimates rise, the euro will strengthen its position against the US dollar. China may also support the regional currency as its economic recovery is great news for the export-oriented eurozone.
Weekly trading plan for EURUSD
Although we successfully sold the EURUSD on a pullback from 1.097, shorts look vulnerable. We can build them up only if the pair falls below 1.0915. At the same time, there’s a high risk that the euro will consolidate against the US dollar ahead of the publication of the US key data on February inflation. Based on that data, bulls can resume attacks to break above 1.1.
Price chart of EURUSD in real time mode
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