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EURUSD movements may have fundamental reasons or could be caused by the closure of speculative positions and carry trades. Such processes usually occur on the eve of important events. Let us discuss the Forex outlook and make up atrading plan.
Weekly Euro fundamental forecast
Trends create confidence, and corrections create doubts. At the beginning of 2024, traders were betting on the discrepancy in the Fed’s forecasts for the federal funds rate with the expectations of the derivatives market. After reaching a consensus, they begin to doubt whether the central bank will change its position. The reason is the unexpected acceleration of January inflation in the USA. The downward trend has stopped. Will there be a correction up? The puzzle makes the EURUSD jump up and down.
While the main currency pair was going down as market forecasts converged with the FOMC’s December forecasts for interest rates, everything was simple and clear. At the end of winter, consolidation came to Forex, which resulted in uncertainty. It leads to an increase in volatility to its highest levels since the beginning of the year. As a result, carry traders close positions and return to funding currencies. This provoked the rebound of the Japanese yen and the euro at the end of February.
Dynamics of EURUSD volatility
Source: Bloomberg.
The upcoming reports on the US PCE and European CPI fuel to the situation. Bloomberg experts expect the core personal consumption expenditure index to accelerate by 0.4% M-o-M, which will lead to an increase in the 6-month indicator above the Fed’s target of 2%. However, if the actual data turns out to be weaker, the EURUSD bulls will go ahead. On the contrary, a further slowdown in inflation in the euro area will encourage the euro bears.
Traders are anxious ahead of the important reports, and they close their positions. Considering that asset managers have been selling the euro for five weeks in a row, long trades could send the price above $1,083.
Dynamics of asset managers’ euro positions
Source: Bloomberg.
Thus, Forex traders are adjusting previously open positions in anticipation of the expected storm. That is, the growth of EURUSD is not related to fundamental factors. According to Goldman Sachs, to exit the trading range of 1.05-1.1 that has taken place since December 2022, the EURUSD needs significant drivers. These are the divergence in the monetary policies of the Fed and the ECB or narrowing the gap in the economic growth of the USA and the euro area.
Simply put, the currency bloc’s GDP should accelerate, while the US growth rate, on the contrary, will slow down significantly. In conditions of high geopolitical risks and enormous differences in labor productivity, this seems unlikely. Just like the Fed’s sudden desire to cut rates faster than the ECB. Most likely, the EURUSD consolidation will continue, which gives reason to stick to the previous strategy of selling the pair on growth.
Weekly EURUSD trading plan
Furthermore, the upcoming meeting of the European Central Bank in early March may put pressure on the euro. No one expects the Governing Council to cut the rates now, but signals may come, including lower inflation forecasts. Thus, I suggest exiting short-term purchases entered on a breakout of 1.0845 and entering medium-term sales on growth.
Price chart of EURUSD in real time mode
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