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Investors again discuss divergence in monetary policy. The different speeds of monetary easing and different start dates put serious pressure on the EURUSD. Let’s discuss the Forex outlook and make up a trading plan.
Weekly Euro fundamental forecast
Central banks usually act in sync, being led by the Fed. However, if any of the regulators decides to deviate from the common trajectory, it and its currency become outsiders. The European Central Bank’s desire for independence resulted in the collapse of the EURUSD to its lowest level since November. The euro suffered its worst weekly drop since the autumn of 2022 due to proud statements by the ECB officials that “the ECB is not the Fed’s’13th Federal District.”
The influence of the Federal Reserve’s monetary policy is not limited to the USA. The size of the US economy and the role of the dollar in the global financial system make other central banks closely monitor what is happening in Washington. Following the acceleration of the US CPI to 3.5% in March and the reduction of derivatives market expectations to rate cuts by the Fed in 2024 instead of six or seven at the beginning of the year, Bloomberg predicts that advanced economies’ central banks will ease monetary policy by less than a quarter of the rate hikes in 2021-2023.
Dynamics of market expectations for central banks’ interest rates
Source: Financial Times.
Of course, a regulator can act ahead of the Fed if it considers the situation different, but its local currency should depreciate in this case. An ECB board member, speaking on condition of anonymity, told the Financial Times that it would be illegal for the ECB to act at the direction of the Federal Reserve. Another official noted that the euro area is not Switzerland. The European Central Bank can operate independently without worrying about the exchange rate of the euro. An insider from the Financial Times claims that only 3 out of 26 members of the ECB Governing Council voted for the rate cut. Another respondent, familiar with the matter, on the contrary, is sure that at least six colleagues were ready to support the doves.
Whatever the reality is, it seems that the issue with the beginning of the monetary easing has already been resolved. The governor of the Bank of France, François Villeroy de Galhau, claims that this should happen in June, and several more rate cuts should be expected before the end of the year. The derivatives market gives only a 22% probability of the start of the process of cutting the federal funds rate in June, so the ECB is clearly ahead of the Fed. Therefore, the single European currency turns into an outsider.
Dynamics of G10 currencies
Source: Financial Times.
So far, the euro has not dropped as deeply as commodity or funding currencies. Moreover, hopes for an increase in IMF forecasts for the global economy and positive corporate reporting in the US may support EURUSD bulls in the third week of April. Continued high global risk appetite could hit the US dollar as a safe-haven asset, while the status of the euro as a pro-cyclical currency should support it.
Weekly EURUSD trading plan
Nonetheless, the different speeds of monetary easing of the ECB and the Fed, which now has widened the US-Germany yield spread to the highest level since 2019, is a far more important driver of the EURUSD downtrend. I suggest selling the pair on the growth with targets at 1.06 and 1.05.
Price chart of EURUSD in real time mode
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