The energy crisis and the ECB aggressive monetary tightening pushed the euro-area economy into a recession. But if gas prices are plummeting and deposit rates are barely below the ceiling, maybe there won’t be a recession? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly euro fundamental forecast
Buy when things are bad. Bloomberg models give a 100% guarantee of a recession in the US economy over the next 12 months, most Reuters experts are of the same opinion. At the same time, 179 out of 257 economists, or about 70%, predict that there will be no sharp decline in unemployment in 2023. That is, the recession is likely to be short and shallow. They’ve been talking about it for a long time. Quite possibly, this factor has been already priced in stock indices. As soon as there are signs that a recession can be avoided, stocks rise, pulling the EURUSD up.
Let’s take Europe for example. A recent Bloomberg poll found that 45% of respondents believe it will enter a recession faster than the UK or the US. Its main drivers are the energy crisis and the ECB aggressive monetary tightening. But as Europe’s gas prices have fallen below €100 per megawatt-hour for the first time since mid-June, some analysts suggest that the downturn in the euro-area economy could be averted. At the same time, inflation may decrease, which will allow the European Central Bank not to raise the interest rate too high.
According to the consensus forecast of Reuters experts, there is very little left to the ceiling of the deposit rate, 175 basis points, while the ECB will make a step of 75 basis points in a few days. For the federal funds rate, this figure is even less, 150 basis points. And again, the Fed is ready to add 75 basis points already in early November. The pace of monetary restriction is slowing down as well as the chances of a recession. Why should one buy a safe-haven asset like the US dollar under such conditions?
Dynamics of central banks’ interest rates
Source: Bloomberg.
At the same time, weak reports on housing prices and consumer confidence could mean that the Fed’s rate ceiling of 5% currently assumed by derivatives may not be reached. Investors buy when things are bad, and bad news becomes good news for stocks and EURUSD. In this regard, the greenback could theoretically be supported by the first positive growth in US GDP in 2022. However, many traders are confident that the indicator will contain many signs of weakness, including a slowdown in consumer activity and the housing market.
Euro bulls are waiting for a surprise from the ECB. It is quite possible that the Governing Council will soon begin the process of winding down the balance sheet, which has grown from €2 trillion to €8.8 trillion in 10 years, equivalent to 70% of the euro-area GDP.
Dynamics of central banks’ balance sheets
Source: Financial Times.
I don’t think one should be too optimistic. If unemployment really does not fall sharply, and the recession is short and shallow, US inflation will also not slow down enough. This will force the Fed to raise the federal funds rate above 5%.
Weekly EURUSD trading plan
What will resume the EURUSD downtrend? Will it be the principle “buy the euro on the news and sell on the facts,” following the ECB October meeting? Or will it be the Fed’s hawkish stance at its November meeting? Let us try to trade the news first. Sell the pair if he price rebounds down from parity or goes below 0.99.
Price chart of EURUSD in real time mode
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