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The strength of the US economy will not stop the Fed. It still intends to cut rates in 2024. The market believed Jerome Powell’s words so much that the EURUSD ascending correction accelerated.
Weekly US dollar fundamental forecast
When Jerome Powell speaks, everyone else is silent. The Fed Chairman’s remarks that the overall inflation picture has not changed and that it is moving towards the 2% target, although the path will be bumpy and the strength of the US economy will not change the central bank’s willingness to cut rates, supported the EURUSD correction up. The massive closure of speculative longs on the US dollar, which reached their highest levels since December 2022, allowed the euro to return above $1.08.
Dynamics of USD index and US dollar speculative positions
Source: Bloomberg.
The Fed is unwilling to abandon its plans to cut the federal funds rate at some point in 2024. It believes there will be difficulties in pressing down the inflation rate to the target. The acceleration of CPI and PCE in January-February did not change the central bank’s outlook. Moreover, the US economy is showing signs of cooling.
When weak economic sectors show signs of recovery, the US dollar rises. This was the case with the ISM manufacturing PMI, which rose above the critical level of 50 for the first time in 16 months. However, a serious slowdown of 1.2 points to 51.4 in March in the purchasing managers’ index in the services sector, a strong part of the US economy, produced the opposite effect. The process of closing speculative longs on the greenback accelerated, which brought EURUSD up to 1.0845.
Dynamics of US services PMI
Source: Bloomberg.
In my opinion, Jerome Powell got the markets talking so much that the strength of the US economy will not stop the Fed’s monetary easing that investors finally believed in a federal funds rate cut in June. Investors were also convinced of the scale of monetary easing, announced in the FOMC’s March forecasts. For several weeks now, the chances of these events happening have remained virtually unchanged.
However, derivatives expect to see higher rates in the long term than the Fed expects. That’s 3.6% in 2027, down from 2.6% in the FOMC’s latest consensus estimate. The strength of the US economy will allow it to withstand high borrowing costs for a long time. This gives reason to say that if the US dollar drops, it will not be that deep.
Dynamics of market’s expectations for central banks’ rates
Source: Financial Times.
Reuters experts expect the EURUSD to rise to 1.09 and 1.1 by the end of June and September. This means that the euro will not compensate for its losses against the US dollar since the beginning of the year in either three or six months.
Weekly EURUSD trading plan
I continue to believe that the major currency pair’s rebound was the result of short covering ahead of the US jobs report, with Jerome Powell’s speech and services PMI data accelerating this process. However, non-farm payrolls will eventually clarify the situation. Unless the EURUSD consolidates above 1.0845, it will be relevant to sell.
Price chart of EURUSD in real time mode
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