.jpg)
What’s better: cutting rates and provoking inflation acceleration or keeping rates high and causing the US economy to plunge into a recession? The Fed must make the decision. Let’s discuss it and make a trading plan for EURUSD.
Weekly fundamental forecast for dollar
Where we start is not important. Where we end is. Did markets get overfocused on the dates of policy expansion and start ignoring where rates will be by the end of the monetary policy easing cycle? And how fast will they be there? A strong economy can afford higher borrowing costs. In this regard, the US’s solid economic positions make markets doubt the Fed will conduct three monetary expansion actions in December, which means the potential of the EURUSD‘s rally is limited.
According to Treasury Secretary Janet Yellen, rates will unlikely return to pre-pandemic levels. From 2010 to 2019, the average yield on US 10-year bonds was 2.39%. It rose above 5% in October and is currently hovering around 4.2%. The decline in this indicator has a positive effect on the economy: mortgage rates have fallen below 7%, stimulating demand for housing; the stock market is rising, increasing Americans’ wealth and encouraging them to buy more.
Fed rate and bond yield evolution
Source: Bloomberg.
Slowing inflation fuels GDP growth. Real hourly earnings rose 1.4% year over year, driven by a more than 4% increase in the nominal indicator and a decline in consumer price growth to 3%.
A break-even era is in the past. The population can spend more, which, together with rising productivity, AI technologies, the influx of foreign labor, and soft financial conditions, stimulates GDP expansion. However, the economy is cyclic. If it stands firmly on its feet amid strong domestic demand, the risks of accelerating inflation increase. That’s what we saw in CPI and PCE reports in January and February. In this situation, the Fed had better not rush and wait for new data.
On the other hand, keeping the federal funds rate at 5.5% for a long time may cool the economy and even trigger a recession. The Fed has to choose the lesser of two evils. The central bank should begin policy easing, but very slowly. Two monetary expansion acts by the end of 2024 will likely be reasonable. However, they can start as early as June.
Any information about the economy’s strength and further inflation trends is a guide to action for investors in such conditions. In this regard, reports on retail sales, which, according to Bloomberg experts, should grow 0.8% in February after a fall of 0.8% MoM in January, and producer prices data could rock the EURUSD’s boat. PPI is expected to grow at previous paces, 0.3% MoM.
Weekly trading plan for EURUSD
Regardless of the statistics, the Fed will have the final say, so the idea of the main currency pair’s consolidating ahead of the FOMC’s meeting on 19-20 March remains valid. The EURUSD’s inability to hold above 1.0945 will be the reason for building up previously opened shorts.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
