2022-10-21 2022-10-21
Dollar enjoys ideal conditions. Forecast as of 21.10.2022

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

Although many world’s central banks raise interest rates, the dollar continues strengthening. The economic conditions are perfect for the greenback. Let us discuss the Forex outlook and make up a EURUSD trading plan.

Quarterly US dollar fundamental forecast

The US dollar enjoys favourable conditions, such as the Treasury yield rally and a drop in the stock indexes. Furthermore, the derivatives market raised the expected federal funds rate ceiling, contributing to the greenback strengthening. The EURUSD bears are not discouraged by the ECB monetary tightening, a drop in gas prices in Europe, stabilization in the UK financial markets, or any other factors.

Amid the rise in the US inflation and the Fed’s willingness to act aggressively, Treasury yields should mark a 12-week rally, the longest since 1984, when the Fed, led by Paul Volcker, conducted a series of aggressive rate hikes. According to Philadelphia Fed President Patrick Harker, by the end of 2022, the federal funds rate will rise significantly above 4%. This is necessary to suppress inflation.

Dynamics of Fed rate and Treasury yield

Source: Bloomberg.

The Treasury yield rally is one of the reasons for the stock indexes drop as stock fundamentals tumble. The market continues moving according to the principle “good economic news is bad for the S&P500.” That is why the decline in the number of initial jobless claims send the index down. The labour market remains stable, which means that the Fed still has a lot of work to cool it down and press down wage growth and inflation.

CME derivatives expect the federal funds rate to exceed 5% by March 2022. Prior to the release of data on US inflation for September, its ceiling was presented to investors at the level of 4.7%. Can it go even higher? Undoubtedly! However, there is a risk that the Fed, under the threat of financial stability, will begin to lag behind the indications of the derivatives market. The latter’s belief that at each of the next two FOMC meetings, in November and December, the interest rate will rise by 75 basis points, and by another 50 basis points in February, supports the EURUSD bears.

Investors are not impressed by the Bloomberg forecast, suggesting that the ECB deposit rate will rise to 2.5% by March 2023, up from the 1.5% expected earlier.

Forecasts for ECB deposit rate

Source: Bloomberg.

In theory, a more aggressive monetary tightening is a bullish factor for a local currency. However, under the current conditions, when the world’s central banks raise interest rates, the recession risks increase. That is why the dollar is strengthening as a safe haven.

Quarterly EURUSD trading plan

The dollar looks invincible. The USD has numerous bullish drivers that will be working in the long term. That is why it will be relevant to sell the EURUSD down to 0.95 and 0.93 at least until the first quarter of 2023, when the Fed will be more likely to suspend its monetary tightening.

Price chart of EURUSD in real time mode