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In 2022-2023, the Fed believed a strong US economy hampers its fight against inflation, but in 2024, it’s ready to cut rates amid rapid GDP growth. How does it affect the EURUSD? Let’s discuss it and make a trading plan.
Weekly fundamental forecast for dollar
If the market isn’t moving in an expected direction, it will likely move in the opposite direction. Is it true of the EURUSD? Maybe not this time. True, the reaction of the main currency pair to US jobs data didn’t live up to expectations, and bears failed to hold positions because of the Fed’s firm intention to cut rates despite a strong economy. But what if the central bank refuses its plan?
The rise in non-farm payrolls by 303 thousand in March, the upward revision of the indicator by 22 thousand in January-February, and the decrease in unemployment from 3.9% to 3.8% should have been another nail in the EURUSD bulls’ coffin. However, buyers have clung to the decline in wage growth to 4.1%—the lowest since June 2021—, the growth of US stock indices, and Bloomberg’s forecasts of an increase in consumer prices and core inflation by 0.3% in March.
US inflation dynamics
Source: Bloomberg.
The S&P 500 has grown on expectations that a strong economy will positively impact corporate profits. At the same time, a better global risk appetite put pressure on the US dollar as a safe-haven currency. However, the main reason for the EURUSD’s roller-coaster ride is the Fed’s change of opinion.
In 2022-2023, the Federal Reserve believed that rapid economic growth would complicate its fight against high prices, but in 2024, it is ready to loosen monetary policy even amid a growing GDP. Such are investors’ conclusions drawn from Jerome Powell’s speeches.
However, the Fed is not a one-man theater. More FOMC officials are going hawkish. Michelle Bowman said the central bank had not yet reached the point where rate cuts would be reasonable. Inflation risks are still high. Dallas Federal Reserve President Lorie Logan noted it was too early to consider monetary expansions.
Fed policymakers are unanimous about taking their time, but the longer they wait, the higher the risks that the Fed will not cut rates at all in 2024. The US presidential elections will also contribute to that. The central bank could refuse to loosen policy not to be accused of supporting the current government.
The market is moving further and further away from the March FOMC forecasts. It forecasts a 48% probability of a federal funds rate cut in June and lowered the odds of three acts of monetary expansion in 2024 from 66% to 56%.
Expectations of Fed rates
Source: Wall Street Journal.
Weekly trading plan for EURUSD
I can’t figure out why the EURUSD should be growing. Have the investors recalled the “don’t play against the Fed” principle? The central bank’s final verdict will still be subject to inflation data. The euro may have rebounded on shorts closing ahead of an important event. Is it wise to open positions before crucial stats are released? I don’t think so. Watch closely the level of 1.0845, the red line for the major 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.
