Not so long ago, the decisiveness of the central bank was perceived as a reason to buy a currency and patience as a reason to sell. Jerome Powell said the Fed needs to be both determined and patient at the same time. How will this affect EURUSD? Let us discuss the Forex outlook and make up a trading plan.
Weekly Euro fundamental forecast
Talking about the politics of data dependency is like weakening the local currency. Looking at the rapid decline in inflation in the US, investors increasingly believe in the end of the Fed’s monetary tightening. And this is not the only reason for the growth of the EURUSD. Jerome Powell has hinted at a Goldilocks regime that usually supports risky assets and presses down the US dollar.
Although the Fed chair tried to suggest a potential rate hike in the future, investors realized that he simply had no other choice than to finish it. Aside from the possibility of a continuation of the cycle, markets will begin to build expectations of a deeper cut in the federal funds rate in 2024 than it is, pressing down Treasury yield.
Therefore, Jerome Powell did not rule out another increase in the borrowing cost after raising it to 5.5%, the highest level in 22 years. According to him, the central bank must be both decisive and patient at the same time, as higher economic growth could lead to faster inflation in the future. At the same time, the Fed no longer predicts a recession but only expects a significant slowdown in GDP growth. Based on the forecasts of Bloomberg experts about the expansion of the indicator by 2% in the second quarter, this will happen gradually.
Dynamics of US GDP
Source: Wall Street Journal.
In fact, by talking about a soft landing, the Fed is creating a Goldilocks economy — a combination of moderate economic expansion and slowing inflation. It is favorable for US stocks, suggests an improvement in global risk appetite, and encourages the EURUSD bulls. No wonder the Dow Jones index reacted to the outcomes of the FOMC July meeting by a rally until over 13 days in a row. This hasn’t happened since 1987 when Paul Volcker ended his fight against inflation.
Even if the ECB wanted to weaken the euro, whose effective exchange rate reached a record high in July, Christine Lagarde does not have such a tool as the Goldilocks regime. Surely the ECB president will focus on the dependence of monetary policy on the incoming data, and the June wording about bringing rates to fairly restrictive levels will disappear from the text of the accompanying statement, but it is not a fact that EURUSD will crash.
Yes, investors doubt the forecast of Bloomberg experts about raising the ECB deposit rate to 4%, they are increasingly talking about the end of the cycle, but disinflation in the euro area is much further than in the US.
Dynamics of ECB deposit rate
Weekly EURUSD trading plan
I suppose the euro should stay afloat. The US strong GDP data will support the US stocks but not the greenback. The EURUSD volatility could rise. However, until the price goes below level 1.096, it will be relevant to buy the euro versus the US dollar.
Price chart of EURUSD in real time mode
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