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Against the backdrop of rising stock indices and falling Treasury yields, the drop in EURUSD looks unnatural. Moreover, European PMIs are growing. What is the reason? Let us discuss the Forex outlook and create a trading plan.
Weekly US dollar fundamental forecast
Synchronization cannot be underestimated. Just the other day, I wrote about its impact on exchange rates and noted that at a time when 80% of the eleven world’s central banks in the world are easing monetary policy, the US dollar is strengthening by an average of 3% per quarter. It is not surprising that the Swiss National Bank, with its unexpected cut in the key rate from 1.75% to 1.5%, launched a mechanism that held back the EURUSD bulls.
The level of monetary policy synchronization is the highest since 2008 in 2024. Bloomberg predicts that 8 of 11 central banks will begin to ease monetary policy in the second quarter, with another 2 joining them in the third. EFG Bank predicts that the world’s largest regulators will cut rates by a total of 200 basis points over 18 months.
Synchronization of central banks’ monetary policy
Source: Bloomberg.
Thus, the SNB caused a shock, encouraging investors to buy the US dollar. Not only did Thomas Jordan and his colleagues cut the rate by 25 basis points, but they also noted in the accompanying statement that they considered the growth of the franc when making their decision. It looks like the era of currency wars is returning. As the global economy recovers from the pandemic and supply shocks fade, not only is inflation slowing, but demand for exports is also rising. And in such conditions, the weakening of the currency will support the economy.
At the same time as Switzerland, Mexico cut rates, which was the first act of monetary easing since February 2021. Despite the fact that the Bank of England kept borrowing costs at a plateau of 5.25%, two MPC members abandoned the idea of tightening monetary policy. As a result, the chances of its weakening starting in June jumped to 70%, and derivatives estimate the scale at 75 basis points, the same as for the Fed. Therefore, the pound also collapsed following the franc.
Who is next? In May, the Riksbank will most likely start lowering its rates; in June, monetary expansion will become widespread. Its synchronization and the return of the era of currency wars will support the US dollar’s leading position among the G10 currencies.
Forecasts for timing of start of monetary easing
Source: Bloomberg.
Moreover, the strength of the US economy may give the Fed reasons to abandon the idea of three cuts in the federal funds rate in 2024. In such conditions, the risks of rising inflation in the USA are higher than if the economy is weak. Therefore, the euro is not supported by the latest highs in stock indices, the drop in Treasury yields, or the improvement in the euro-area PMIs. EURUSD bulls are frightened by the massive easing of monetary policy by Europe’s leading central banks. And which regulator is first in this process, its currency is the loser.
Weekly EURUSD trading plan
Unless the euro goes above $1.085 in the near future, it will be more likely to drop below $1.08 and $1.07. As the EURUSD isn’t rising amid the Fed’s dovish stance, the bulls look weak, and it is relevant to sell the pair.
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.
