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The Fed did not change its December forecasts, which satisfied financial markets. The EURUSD has returned above 1.09. Should we expect the rally to continue? Let us discuss the Forex outlook and create a trading plan.
Weekly US dollar fundamental forecast
Investors were looking forward to FOMC’s updated forecast for the federal funds rate, and Jerome Powell encouraged the market’s Greed. The first-ever rises of the S&P 500 above 5200 and gold above $2200, as well as the return of EURUSD above 1.09, were provoked by Powell’s phrases that the latest inflation data did not change the overall scenario and that the monetary easing would start soon.
Investors saw what they wanted to see – the continuation of the FOMC’s December forecasts of three acts of monetary easing in 2024. Only two of 19 officials do not expect a cut in the federal funds rate; another sees it falling by only 25 basis points. Most are willing to lower borrowing costs to 4.75%.
FOMC forecasts for federal funds rate
Source: Bloomberg.
The chances of June for the start of monetary expansion jumped from 55% to 75%, Treasury yields collapsed, and stock indices have once again broken through all-time highs. This has become a perfect storm for the US dollar.
The Fed has signaled that it no longer needs a recession to achieve its inflation target. The US central bank raised its GDP growth forecast for 2024 from 1.4% to 2.1%, suggesting a Goldilocks economy for markets. The S&P 500 is naturally soaring.
Dynamics of market expectations for Fed rate cuts
Source: Bloomberg.
However, things might not be so bright. Now, only one FOMC official needs to change their opinion for the consensus forecast to shift from three to two rate cuts in 2024. In December, two Federal Reserve officials needed to do this. The long-term neutral rate was raised from 2.5% to 2.6%. As well as the inflation forecast for the end of this year – from 2.4% to 2.6%. The Fed sees a higher PCE but does not intend to abandon the idea of easing monetary policy. The EURUSD bulls should be encouraged to go ahead.
Thus, financial market fears that the central bank would signal borrowing costs to plateau for longer did not materialize. At the same time, the EURUSD trend still depends on US inflation. If PCE continues to accelerate in March, the US dollar will be back in play.
Central banks’ policies remain data-driven, as Christine Lagarde has once again reminded us. The ECB president argues that the ECB cannot commit to lowering deposit rates at every meeting after June. EURUSD bears expected that the easing of monetary policy in Europe would proceed faster than in the United States. However, Frankfurt still seems to be looking up to Washington.
Weekly EURUSD trading plan
The EURUSD could continue rising until the US jobs report and inflation data are released. I suggest holding up the longs entered at 1.088 and 1.0905 for now. Nonetheless, the euro’s growth potential is limited as the US economy remains strong, and the world’s leading central banks should be easing their monetary policies in sync.
Price chart of EURUSD in real time mode
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