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Investors, as usual, are focused on the Fed’s comments and actions. Markets are afraid that the situation of the 1970s when a premature victory over inflation turned into a recession, will repeat. Let us discuss the Forex outlook and create a EURUSD trading plan.
Weekly US dollar fundamental forecast
The Fed, as always, determines the market sentiment. Expecting at the beginning of the year to see a federal funds rate cut by 1.50% to 4% starting in early spring, investors by mid-March doubt that the Federal Reserve will maintain its forecast of three rate cuts and are choosing between June and July for the start of monetary easing. Not surprisingly, Treasury yields are rising, and stock indexes are falling, encouraging the EURUSD bears.
In 2023, bad news from the US economy turned to good news for the S&P 500, as stocks rose on expectations of a Fed dovish shift. In 2024, the signs of the US economic strength are again supporting the stock indices, and weak reports cause them to fall. Instead of a soft landing, the USA could face stagflation, a combination of slow GDP growth and accelerating consumer prices. Indeed, both CPI and PPI rose unexpectedly in February, while retail sales and consumer sentiment turned out to be weak.
Dynamics of US inflation
Source: Financial Times
Just a couple of weeks ago, investors were actively discussing the idea of the US gross domestic product acceleration. This stark contrast helps explain why the odds of a federal funds rate cut in June fell from 71% to 55% in a matter of days, while the odds of keeping it at 5.5% in July rose from 8% to 24%.
Of course, it is too early to talk about stagflation in the USA. GDP is expanding at an impressive rate, with Goldman Sachs expecting it to slow to 1.7% in the first quarter – a very good figure compared with sluggish economic growth in the euro area. Inflation has fallen significantly from its peak in mid-2022. However, both markets and the Fed worry that history will repeat itself with the return of high prices in the 1970s. Then the central bank’s premature victory over inflation turned into a double-dip recession in the United States.
Therefore, academic economists at the Financial Times predict that the federal funds rate will fall more than three times. This year, as markets expect and the FOMC’s December forecasts state, there will be one or two. The most likely months for the start of the Federal Reserve’s monetary easing seem to be July and September.
Forecasts for Fed’s monetary easing start
Source: Financial Times
However, as we remember, the Fed is the leader in this fascinating dance. Neither investors nor academic economists affect the situation. The future trends of many financial market assets, including the medium-term prospects of EURUSD, will depend on the central bank’s verdict.
Weekly EURUSD trading plan
If Jerome Powell and his team are willing to lower the federal funds rate in June, a signal that could be received with a continuation of December’s forecasts of three rate cuts in 2024, the euro has a chance to return above $1.1 in the near future. On the contrary, a more hawkish consensus estimate will shift expectations for the start of the Fed’s monetary easing to July. The latter scenario will suggest selling the EURUSD in the direction of 1.08 and 1.07.
Price chart of EURUSD in real time mode
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