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The downward trend in EURUSD is based on the Federal Reserve’s slowness and divergence in economic growth in the US and the euro area. If it were not for the US stock indices, the pair would have traded significantly lower. Let’s discuss the Forex outlook and make up a trading plan.
Weekly Euro fundamental forecast
The major currency pair has been stuck in consolidation amid a renewed rally in the US stock indexes and hawkish comments by an authoritative FOMC official who did not allow haste in making a decision on lowering the federal funds rate. Meanwhile, German economic institutions are lowering their GDP forecasts, indicating growing risks of a continuation of the EURUSD downtrend.
There are a couple of days left before the end of the first quarter, and according to its results, the euro dipped against the US dollar by 2%. The two main reasons are changing market views on the trend of the federal funds rate and divergence in economic growth. If, 6 months ago, Bloomberg experts predicted an expansion of US GDP by 0.9%, now they believe that it will expand by 2.2%. In contrast, five leading German institutes cut their GDP growth estimates for Germany from 1.3% to 0.1% over the same period.
The main reasons cited are weak domestic demand, the negative impact of high energy prices on exports, and a declining share of investment in GDP. According to this indicator, Germany lags behind most advanced economies.
Investement share in GDP
Source: Bloomberg.
Investors have doubts bout the euro-area economic recovery, while the US economy is performing better than expected. The American exceptionalism factor remains in play, pushing the EURUSD lower.
The strength of the economy, along with a strong labor market and the latest disappointing US inflation data, according to Christopher Waller, are arguments in favor of the Fed waiting to cut the federal funds rate. The FOMC official believes that it is advisable to reduce the scale of monetary expansion and shift the start date to a later period, looking at the latest reports on CPI and PCE. After his speech, derivatives dropped the chances of the Federal Reserve beginning the process of easing monetary policy in June to 63%. At the beginning of the last week of March, they were 75%.
Unlike the Fed, ECB officials do not intend to shift the start date to a later period. On the contrary, the new member of the Governing Council, Piero Cipollone, is ready to vote for a rate cut as early as April. In his opinion, wage growth has reached its peak and will continue to fall. So is inflation. Indeed, the core Spanish CPI slowed in March from 3.5% to 3.3%. Despite the rise in consumer prices to 3.2%, it turned out to be lower than the 3.3% expected by Bloomberg experts.
Dynamics of Spain’s inflation
Source: Bloomberg.
Weekly EURUSD trading plan
It is possible that the ECB will start earlier than the Fed, which, along with the US exceptionalism, will support the EURUSD bears. If it were not for the confident rally of US stock indices, the pair would already be trading significantly lower. In the meantime, a breakout of the euro below $1.08 or a rebound from the resistances at $1.084 and $1.087 will be a signal to enter or add up to the shorts towards the previously indicated target at $1.07.
Price chart of EURUSD in real time mode
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