The acceleration of German inflation to double digits and the decision of the German government to set a ceiling on gas prices encouraged the EURUSD bulls. However, how high could the euro rise? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly euro fundamental forecast
There is safety in numbers. The Bank of England decided to challenge this vital principle. Due to the BoE bond purchases, not only the pound but also other European currencies began to grow. The EURUSD upward correction was also supported by the news that Germany’s inflation has reached double digits for the first time over the past 70 years. The European Central Bank is ready to hike the interest rates aggressively, and the government is not far behind. Germany introduces a ceiling on gas prices, to maintain which it is ready to spend €200 billion. Will this be enough?
For the first time since 1951, German inflation reached 10.9% annually. +2.2% monthly looks like a huge figure. The main reasons given are the expiration of temporary measures to protect households and businesses from the impact of high prices, as well as energy products. The cost of the latter accelerated from 35.5% to 43.3% in September.
Dynamics of Germany’s inflation
Source: Bloomberg
According to leading German economic institutions, if gas prices continue to rise, the economy will shrink by 7.9% in 2023. Even in the baseline scenario, the country will not avoid a recession, which makes it an outsider of the G7. Fearing the worst, the German government decided to impose restrictions on the further growth of gas prices. Chancellor Olaf Scholz called it a big protective shield for the economy. However, will the announced €200 billion be enough to fight the financial markets? I highly doubt it.
Forecasts for GDPs in G7 countries
Source: Wall Street Journal
I don’t think the Bank of England will manage to keep the pound afloat. So far, short positions in sterling are being closed on the unwillingness of investors to play against the regulator. The British currency is supported by high yields of local bonds and the intention of the BoE to aggressively tighten monetary policy at the November meeting. They even talk about +150 basis points.
Nonetheless, attempts to save sinking currencies with the help of foreign exchange interventions, as in Japan, the gas price ceiling, as in Germany, or the resuscitation of QE, as in the UK, are ineffective. A coordinated Forex intervention with the participation of the Fed is required, and the Fed will not agree to this.
The Fed is satisfied with the current situation, associated with the Treasury yield rally, stock indexes drop, and a strong dollar. All this together leads to a tightening of financial conditions, and ultimately to the suppression of inflation. Furthermore, St. Louis Fed President James Bullard claims that the markets correctly interpret the information coming from the Fed. The President of the Federal Reserve Bank of Cleveland. Loretta Mester hopes to see the federal funds rate at 5% in 2023.
Weekly EURUSD trading plan
In my opinion, the efforts of the Bank of England and the German government will only have a temporary effect. With such a current account deficit as in the UK, the pound will likely sink. The German government will hardly stop the market. Therefore, it is still relevant to sell the EURUSD on the correction. Watch the tests of the resistances at $0.9845 and $0.9885; if the price rebounds, enter the euro sell trades.
Price chart of EURUSD in real time mode
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