When the Bank of England or any other regulator reassures financial markets, traders begin to sell the US dollar as a safe-haven asset. The greenback benefits from turmoil and uncertainty. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
The UN calls on the Fed and other central banks to stop tightening monetary policy, as it will inevitably lead to a recession in the global economy. According to the organization, every rate hike by 100 basis points at the federal funds rate reduces the GDP of advanced economies by 0.5%, and in emerging markets — by 0.8%. Richmond Fed President Thomas Barkin reasonably replies that the Fed is concerned about the damage that could be done on a global scale, but the regulator is focused on the US economy. And this circumstance supports the EURUSD bears.
The UN’s concerns are understandable: the drop in the JP Morgan Global Purchasing Managers’ Index to 49.8, the lowest since June 2020, indicates that global production has fallen for the first time in two years. In the US, the PMI is still above the critical 50 mark, but the Institute for Supply Management reported the index has dropped to its lowest level since May 2020.
Dynamics of global PMI
Source: Trading Economics.
The market took this news as positive. After all, if the US economy is cooling, then the Fed’s policy is successful, and eventually, the central bank will slow down monetary tightening and proceed to rate cuts. Stock indices rose on the first working day of the quarter, which supported the EURUSD bulls. The euro was also supported by the pound, which managed to rise above $1.13 on information that the Treasury is postponing plans to reduce income tax for the wealthiest people from 45% to 40%. In addition, the Bank of England managed to calm the financial markets, resuming the QE. It has spent £3.66 billion of a possible £20 billion since the start of the program. Likely, the announced £65 billion will not be needed. The storm is over.
If the worst is over, what’s the point of buying the US dollar? The greenback gets preferences as the main safe-haven currency in 2022, which is not surprising given the shocks that humanity and financial markets have faced. The pandemic, the war in Ukraine, the energy crisis, the drop in the EURUSD to a 20-year low, the Forex interventions of the Bank of Japan, and the fall of the pound to an all-time low suggest that there has never been such a busy year in Forex in a generation. Not surprisingly, volatility is growing by leaps and bounds, providing an opportunity to make good money.
Dynamics of Forex volatility
Source: Bloomberg.
Increasing uncertainty is a good sign for the US dollar. It will hardly end soon. Yes, the Bank of England managed to cool down the overheated markets, but who knows how Europe will survive the winter? How will the Fed’s aggressive monetary restriction affect the global economy? When will the war in Ukraine end? And what will be the results?
Weekly EURUSD trading plan
Investors have too many questions. As the uncertainty continues, there is no use in selling the greenback. Therefore, a possible EURUSD correction up is limited. Shift from the short-term euro purchases entered on the breakout of the resistance at $0.985 to the medium-term sales on the rebound from $0.9885, $0.995 and $1.
Price chart of EURUSD in real time mode
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