2022-10-17 2022-10-17
Dollar is against interventions. Forecast as of 17.10.2022

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

The US dollar is so strong that the only way to weaken it is a coordinated FX intervention. However, it is not that simple. Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

During the pandemic, central banks and governments acted in the same team, but now, on the eve of another recession, they seem to move independently. This leads to turmoil in financial markets and strengthens the position of the US dollar as the main safe-haven asset. Without a coordinated plan, other currencies will be falling versus the dollar.

Jeremy Hunt, appointed as the new UK Treasury chief, has now said taxation will rise and public spending will shrink, despite Britain’s growing cost-of-living crisis, because the fiscal stimulus policy fails. His speech supported the pound and other European currencies. The calls for Liz Truss to step down as prime minister add to political uncertainty, but it’s more important for investors that fiscal and monetary policies be balanced.

The UK economy is about to slide down into a recession. 47% of 452 MLIV Pulse respondents believe that it is the UK that will be the first to face a recession in the economy. 45% suggest the euro area, and only 7% — the US.

Projections for recessions in the largest world economies

Source: Bloomberg.

At the same time, Wall Street Journal experts raised the probability of a recession in the United States in the next 12 months from 49% in July to 63%. This is the highest figure since the summer of 2020. The specialists believe that the recession will come already in the first or second quarters, although they previously predicted that in January-March and April-June, US GDP would expand by 0.8% and 1%.

The experts believe the Fed will raise the federal funds rate to 4.267% in December and to a peak of 4.551% in June. 30% of economists suggest that the interest rate will be cut in the fourth quarter of 2023, and 28.3% expect it in the first quarter of 2024.

Analysts’ forecasts are less aggressive than those of the derivatives market and the Fed. Furthermore, Liz Truss’s government refused the “mini-budget,” and St. Louis Fed President James Bullard says the US dollar will be weakening once the Fed’s monetary tightening reaches its peak. The above factors allowed the EURUSD to consolidate above the important support of 0.97.

Of course, the factor of contradictions in the policy of the government and the Bank of England has been priced in the GBP quotes, and traders are exiting shorts hoping that the situation will improve. Nonetheless, the fundamental reasons for the EURUSD downtrend have not changed. The strength of the US economy, high demand for safe-haven assets, and interest rates press down the pair.

Moreover, the USA is unwilling to take part in the FX interventions. Joe Biden does not believe the greenback is to blame for the global economy’s troubles. Rather, anemic GDP growth in individual countries and contradictions in politics. He calls Liz Truss’s plan to cut taxes a mistake. The Fed’s primary task is to press down inflation, and the USD will be rallying up until the policy changes.

Weekly EURUSD trading plan

Summing up all the above, it is still relevant to sell the EURUSD on the rise or on the breakout of the support at 0.97.

Price chart of EURUSD in real time mode