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Judging by ECB officials’ comments, the European Central Bank has already decided to lower the deposit rate in June. Therefore, the EURUSD future trend will depend on the change in the Fed’s views. Let us discuss the Forex outlook and create atrading plan.
Weekly US dollar fundamental forecast
Everyone has their own fears. The stock market does not show its fear of a more hawkish Fed, which cannot be said about Forex. Fears that the central bank will suggest two rate cuts instead of three in its updated forecasts encourage investors to sell the US dollar. Attempts by the EURUSD bulls to return the price above 1.09 were stopped, and the main currency pair continued falling.
In early spring, market estimates for the federal funds rate trend and the Fed’s forecasts came into agreement. However, when financial conditions are easing, lending is tight, unemployment is low, income growth is accelerating, and speculation is rampant, it is not an environment in which inflation will slow down. The US central bank could easily change its mind. This is especially acute in a data-driven policy environment, where data suggests rising inflationary pressures.
Dynamics of forecasts for Fed rate
Source: Wall Street Journal.
A strong labor market and faster growth in consumer spending in the USA than in the euro area give the Fed reason to worry about easing the pressure on demand that it unleashed with an aggressive rate hike to 5.5%. On the contrary, the ECB fears that limiting demand for too long by keeping the deposit rate at 4% could result in a hard landing for the economy.
On the other hand, the European Central Bank traditionally took its steps after the Federal Reserve. A faster start risks a serious weakening of the euro against the US dollar, which could push inflation up. I don’t think Christine Lagarde and her colleagues are afraid of this. On the contrary, a drop in the EURUSD will have a positive effect on the export-led economy of the currency bloc. At the beginning of 2024, the state of its foreign trade began to improve, which Pantheon Macroeconomics associates with the delayed effects of 2022-2023.
Dynamics of euro-area foreign trade
Source: Financial Times.
The ECB officials are trying to convince the markets that it will start lowering rates in June. Most likely, the Governing Council has already made a decision. The trend of the major currency pair depends on whether the Fed changes its mind. The same timing of the start of monetary easing will help to maintain EURUSD trading in the upper part of the 1.05-1.1 range. On the contrary, a shift in expectations for July will push the price to the bottom.
Food for thought may include a rise in five-year inflation expectations to 2.45% based on CPI-linked swaps. As the benchmark fell to 2.3%, the stock market responded with a strong rally, but now growing concerns about the return of high inflation could weigh on stock indexes, worsen global risk appetite, and strengthen the US dollar as a safe-haven currency.
Weekly EURUSD trading plan
Therefore, the strategy of selling the EURUSD at 1.097 and adding to the shorts looks promising. I suggest holding down the short positions at least until the Fed meeting minutes are reported.
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.
