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For a long time, the Federal Reserve’s firm commitment to cutting rates has been setting back the EURUSD bears. However, the third consecutive acceleration of the US inflation discourages the euro bulls. Let’s discuss the Forex outlook and draw up a trading plan.
Monthly US dollar fundamental forecast
The Fed can also be wrong. The rapid slowdown in inflation in 2023 has made FOMC officials overconfident. They could ignore the acceleration of prices in January-February, arguing that the overall story had not changed. They say that the trends in CPI and PCE remain downward, and the indicators will still reach the target of 2%, although there could be occasional spikes in inflation. However, a third consecutive acceleration in inflation risks changing the Fed’s outlook, discouraging the EURUSD bulls.
In March, consumer prices accelerated to 3.5%, core inflation was anchored at 3.8%. The disinflationary process is clearly in reverse, forcing markets to ask different questions. If previously investors were worried about when exactly the Fed would begin to cut the federal funds rate, now, Forex traders are discussing whether monetary policy will begin to ease at all in 2024.
Before the release of the US inflation report, the derivatives market assessed the chances of the start of monetary expansion in June as 50/50; after the release of important statistics, they fell to 18%. Derivatives do not have much faith in July, preferring September. The estimated scale of the Fed’s monetary easing this year fell from 65 basis points to 45 basis points. For the ECB, the estimated scale of the rate cuts is 80 basis points. The EURUSD is naturally falling.
Dynamics of market expectations for Fed’s rate
Source: Wall Street Journal.
The European Central Bank signals that it is going to start monetary easing in June. This would be a compromise between hawks who recognize the slowdown in inflation and doves who are surprised by the lack of resistance from opponents. However, by the summer, according to Bloomberg estimates, consumer prices in the euro area could fall to 1.8%; economic growth remains weak. The ECB is going to find itself in an extremely difficult position. The regulator will be forced to cut rates either at each meeting or make a deeper cut of 50 basis points at one of the meetings. So, isn’t it better to anticipate events and start monetary expansion in April?
Dynamics of market expectations for ECB rate
Source: Bloomberg.
Thus, investors’ attention has finally shifted from the start date to the speed of monetary easing. At the same time, the mirror-opposite picture of 2015-2016 takes place now. Nine years ago, the Federal Reserve signaled that it was going to raise rates but repeatedly delayed its decision due to the weakness of the global economy. Ultimately, the federal funds rate increased only twice – in December 2015 and in December 2016. The US dollar initially grew on expectations of monetary restriction but then lost ground.
Nowadays, the US economy is so strong that the Fed has to shift the timing of rate cuts to a later period. The greenback is the strongest G10 currency, although the forecasts were gloomy at the beginning of the year.
Monthly EURUSD trading plan
I believe the EURUSD will continue falling. Even if US inflation begins to accelerate in April, the Fed will need more data to adjust its monetary policy. I recommend holding down the shorts entered at the level of 1.0845 and adding them up on corrections.
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.
