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Has the US economy had a soft landing? Don’t ask the pilot. Jerome Powell didn’t make markets give up the idea that the rate would be cut in April – June. And the EURUSD’s reaction isn’t surprising. Let’s discuss it and make a trading plan.
Weekly fundamental forecast for dollar
If a currency needs good news to grow, something’s wrong. Investors hoped that Jerome Powell would push back against market expectations of a rate cut in the first half of the year. That didn’t happen, and they started buying treasuries; their yield fell and hit the USD. However, the EURUSD had already begun rallying during the European Forex session when Chancellor Jeremy Hunt’s fiscal stimuli supported the pound and other currencies of the Old World and optimistic stats on German foreign trade supported the euro.
Has a soft landing happened? Don’t ask the pilot. Jerome Powell refused to answer the question, saying the Fed intended to continue work and announcing a victory over inflation was too early. The recent strength of the US economy doesn’t mean the central bank has given up its plan to loosen monetary policy. On the contrary, it must take the first step with much caution. Investors have realized that the recent labor market and inflation data didn’t change the Fed’s outlook and started actively buying the EURUSD.
Indeed, Jerome Powell noted that the Fed was not hoping for better CPI and PCE numbers; it just wanted data that was more similar to the previous stats.
The question of whether or not the Fed will cut rates in 2024 looks resolved. If the US economy begins to crack shortly, monetary expansion may start as early as April. In this regard, the American employment report is of key importance. If the stats turn out disappointing, the EURUSD can soar above 1.1.
Still, the main currency pair must stand the test at the ECB’s meeting. A split within the Governing Council is obvious. Hawks point to the persistence of service inflation and warn against hasty steps to loosen monetary policy. They fear the ECB may repeat the Fed’s mistakes from the 1970s. Doves, on the contrary, note a drastic decline in consumer prices and worry that keeping the deposit rate at 4% will bury the eurozone’s economy.
European inflation trends
Source: Financial Times.
At the same time, a Reuters insider insists that ECB officials will unlikely reduce borrowing costs before June. The last mile of the fight against inflation will be the most difficult amid the strong labor market and high wage growth, so monetary expansion will unlikely start in March or April. This line of Christine Lagarde’s reasoning can support the EURUSD.
The current situation is very similar to what happened in the autumn and winter of 2023 when Jerome Powell was expected to fight back against dovish market expectations. After he did not do so, gold hit a record high, and the S&P 500 and the EURUSD skyrocketed.
Weekly trading plan for EURUSD
The euro’s breakout of the upper boundary of the $1.077-1.088 range changed the balance of power. As long as the EURUSD trades above 1.088, longs should be given preference. When the pair resumes consolidation, bears may come to their senses.
Price chart of EURUSD in real time mode
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