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Investors should predict the Fed’s further actions to make profits. The key question is about the time frame and the scale of the future rate cuts. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly Euro fundamental forecast
Speed matters. For a long time, markets paid attention to only two issues. When exactly will the Fed start cutting the federal funds rate? And how deep will it fall? Investors now face a new puzzle: how quickly will the central bank ease monetary policy? Its slowness may become a new driver for the growth of the US dollar. It is not surprising that EURUSD bulls are set back.
Typically, the Fed raises rates slowly and lowers them much faster. The slow monetary restriction is determined by the principle of “do no harm.” The regulator is going step by step, fearing to damage the economy. However, the easing of monetary policy in a recession must be swift and decisive. It is not relevant this time. There is no sign of a recession in the US economy.
Moreover, the strength of the US economy has discouraged traders from betting on an aggressive rate cut. CME derivatives stopped forecasting a more than 75-basis-point drop in the fed funds rate in 2024. The expectations of excessive monetary stimulus will hardly be met. The market now has a fair price.
Dynamics of market expectations for scale of Fed’s monetary easing
Source: Bloomberg.
Investors have ruled out March and May as potential months for the Fed to begin easing monetary policy. Their forecasts have shifted to June. And here, the market came to a consensus with the central bank. However, it should be considered that the opinion of Jerome Powell and his colleagues was formed in December, and since then, a lot has changed.
The US economy leaves no doubt about its strength, and FOMC officials are increasingly talking about cutting rates by the end of the year. Michelle Bowman noted that it is too early to launch the mechanism of monetary expansion. She drew attention to the risks of accelerating inflation due to continued geopolitical tensions, a strong labor market, and weakening financial conditions.
The last mile of the Fed’s fight against high inflation will be very difficult, according to ratings agency Fitch, as the conflict in the Red Sea has increased freight costs and could drive up prices around the world. However, prices should not grow at such a fast pace as during the recovery from the pandemic in 2021.
It is likely that the Fed will cut rates very slowly, pausing at not just one but several FOMC meetings. Unlike the ECB, which risks cutting the rates much faster. The euro-area economy is much more sensitive to aggressive monetary tightening since Europe depends on bank lending more than the United States. A decline in its growth rate slows down GDP.
Dynamics of bank lending in euro area
Source: Financial Times.
Weekly EURUSD trading plan
Thus, the speed really matters, and investors should start selling the EURUSD soon. In the meantime, I stick to my forecast of a consolidation in the range of 1.077-1.088. It makes sense to enter shorts on the price rise.
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.
