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The US presidential elections can help the EURUSD bears, but investors have been entirely focused on central banks’ policy so far. It is as transparent as possible and leads to consolidation. Let’s discuss it and make a trading plan.
Weekly fundamental forecast for euro
The market is an endless battlefield between investors and central banks. When their opinions differ, trends emerge. Conversely, a consensus results in consolidation. The end of 2023 and the start of 2024 have given us a bright example. The EURUSD rose in Q4 amid expectations of a 150-point fed funds rate cut to 4%, although the FOMC’s December outlook suggested a smaller monetary expansion. In January-February, the market revised the outlook. It’s in line with the Fed now, and the major currency pair got stuck in a consolidation range.
Similar processes take place in Europe. Forty-six out of seventy-three Reuters experts expect the ECB deposit rate to drop by 25 basis points to 3.75% in June. Forty-five percent of respondents surveyed in January shared this opinion. Why June? Inflation will slow down even more, and the central bank will have the newest wage stats, ING believes. A consensus forecast is that borrowing costs will drop by 100 basis points in 2024, consistent with market expectations.
According to Bloomberg experts, the risks of an earlier rate cut outweigh the danger of keeping it at 4% for too long. The ECB’s hawks are in favor of the former scenario. They believe that geopolitical factors, a strong labor market, and growth in real wages can lead to a new inflation round. Conversely, the doves worry that borrowing costs are too high, badly affecting the economy.
ECB deposit rate outlook
Source: Bloomberg.
Experts surveyed by Bloomberg recognize the US presidential elections and the rise of populist movements in Europe as the main risks for the eurozone. I’d say, for the euro, too. A Joe Biden v Donald Trump rematch will likely support the EURUSD bears. However, politics isn’t the main concern for the major currency pair: it has to deal with central banks.
Major risks for eurozone’s economy
Source: Bloomberg.
Thus, markets and economists have made a consensus outlook for the ECB’s rate. The start of monetary expansion is expected in June, both in the US and the eurozone, and borrowing costs will fall by 75-100 basis points, benefiting neither the euro nor the US dollar and locking the major currency pair in consolidation. How could it exit the consolidation range?
The American economy must cool so that the upper boundary of the 1.077-1.088 trading range could be broken. If labor market data and other macro statistics signal a slowdown in GDP growth, market expectations for the start of the Fed’s monetary expansion will shift from June to May, giving the green light to the EURUSD. On the contrary, a US inflation boost will be a basis for selling the pair.
Weekly trading plan for EURUSD
It’s recommended to keep our February strategy of selling the euro on growth with a target at $1.088 and buying it on decline to support at $1.077 and $1.0725. The EURUSD’s consolidation will likely strengthen as the ECB’s March meeting and US labor market data for February approach.
Price chart of EURUSD in real time mode
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