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Monetary easing is not a stimulus but an antidepressant, as real rates remain high. And the ECB could use them more than the Fed. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Monthly Euro fundamental forecast
The unexpected rate cut by the Swiss National Bank and the refusal of the Bank of England hawks to vote for tightening monetary policy are forcing investors to extrapolate what happened to other central banks in Europe. The words of the head of the Bundesbank, Joachim Nagel, that the ECB is ready to lower the interest rates, even if the Fed does not do so, dropped EURUSD to 1.08.
The last cycle of monetary tightening was unique. Central banks raised rates very quickly, allowing for talk of the most aggressive monetary restriction in decades. The weakening will be different. Regulators intend to move slowly, constantly examining the data. However, some economies simply need a faster monetary expansion.
Dynamics of central banks’ interest rates
Source: Reuters.
It must be understood that in the current cycle, reducing rates is not a stimulus but an antidepressant. When the ECB raised borrowing costs to a 4% plateau in September, euro-area inflation was 4.3%. That is, real rates fluctuated around zero. Now, as the CPI fell to 2.6%, they rose to 1.4%. The same figure for the UK is 1.85%. This hinders European economies that are already weak.
The US economy, on the contrary, is strong. Massive fiscal stimulus due to the pandemic, the associated rise in excess savings, the influx of migrants, artificial intelligence technologies, and sharp productivity growth are allowing the US GDP to expand by 3% or more. Such an economy can withstand high real rates. Moreover, its re-takeoff instead of a soft landing accelerates inflation, forcing the Fed to think twice before easing monetary policy.
Bloomberg experts expect the personal consumption expenditure index, the Fed’s preferred inflation indicator, to accelerate from 0.3% to 0.4% M-o-M. The three-month indicator is ready to show the fastest rise since May, and the six-month indicator will also accelerate. Isn’t it too early to switch to monetary antidepressants?
Dynamics of US inflation
Source: Bloomberg.
Due to the US economic strength, the Fed can ease monetary policy slower than the ECB. The federal funds rate could remain above 5% at the end of 2024, while the ECB rate could drop by 75 basis points at the same time. If so, the US-Germany yield spread will widen even more, and the EURUSD will go down below 1.05.
Monthly EURUSD trading plan
Thus, market views are changing. Investors are shifting their attention from the timing of monetary easing to its speed. The ECB is likely to act faster than the Fed. Therefore, I suggest selling the EURUSD further. The price has reached the first target at 1.08 so far, and we are waiting for the second one.
Price chart of EURUSD in real time mode
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