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When central banks cut rates along with the Fed in the past, the US dollar rose an average of 3% per quarter. Asset managers were wrong to sell the dollar, but the EURUSD trend still depends on the Federal Reserve. Let us discuss the Forex outlook and create a trading plan.
Fundamental US dollar forecast today
Following a failure in the fourth quarter of 2023, there were numerous forecasts for the dollar fall in 2024. However, in January-March, the greenback was the best performer among the G10 currencies, leaving the asset managers who sell it in the cold. The latter’s bet on a weaker greenback just because the Fed should ease monetary policy turned out to be wrong. First, the scale of the federal funds rate cut should not be as large as it seemed at the end of 2023. Furthermore, global central banks’ synchronization of monetary expansion also encourages the EURUSD bears.
Eight of the world’s eleven largest central banks are expected to begin monetary easing in the second quarter of 2024, and two more will join this group in the third quarter. History shows that when 80% of regulators cut rates together, the US dollar strengthened by an average of 3% each quarter.
Forecasts for central banks’ rate cuts
Source: Bloomberg
The current synchronization is the largest since 2008, when central banks joined their efforts to save the global economy from the crisis. The US dollar, with its American exceptionalism, including impressive GDP growth and high demand for US securities, continues to thrive.
Bloomberg experts’ consensus forecasts about the growth of EURUSD to 1.1 in the autumn and the of USDJPY to 139 by the end of the year raise serious doubts. While asset managers are gradually reducing their greenback shorts, they remain bearish. This means that the US dollar may surprise even more.
Dynamics of USD and asset managers’ positions
Source: Bloomberg
However, judging by the next record high in the S&P 500, the stock market is not afraid of the Fed. Are investors so confident in maintaining the FOMC’s December forecasts of three rate cuts? Yes, the Fed faces a dilemma. While the central bank remains focused on fighting inflation, it doesn’t want to take any risks by keeping the federal funds rate high at 5.5%. So, the risk of a recession remains high.
Will the Fed wait longer due to the latest US inflation data? If it waits too long, the US economy could experience a recession. Investors are focused on the updated FOMC forecasts for interest rates and also the possibility of Jerome Powell abandoning his signals about a rate cut in the middle of the year.
Timing, scale, and speed. That’s what worries financial markets. However, there are always two currencies in any Forex pair, and synchronizing monetary expansion will prevent the US dollar from falling too deep, even if the Fed insists on lowering borrowing costs at three meetings in 2024.
EURUSD trading plan today
Maintaining the December FOMC forecasts will encourage the EURUSD bulls. If the price breaks out resistance at 1.088 and 1.090, it will be relevant to buy the pair. If the price doesn’t consolidate above the first resistance or rebound down from the second one, it will be relevant to sell. If the Fed suggests two rate cuts this year instead of two, the euro will continue trading down.
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.
