When will the global economic recession start, and how deep will it be? Ahead of a crisis, the dollar bulls usually go ahead. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Fundamental dollar forecast today
The worst is yet to come. You have three days left. What do the IMF and the Bank of England want to achieve with their loud statements? Do they want to scare investors? They are already scared. The question is not whether there will be a recession in the global economy but when and how deep it will be. And any reminders of a coming downturn lead to new shocks, encouraging investors to buy safe-haven assets. The best option to invest in seems to be the US dollar. That is why the EURUSD upward corrections are so shallow.
The IMF cut its global GDP growth forecast for 2023 to 2.7% from 2.9%, suggested in July. This is significantly lower than 3.2% in 2022 and 6.1% in 2021 and is the lowest estimate since 2001 if we do not consider the crises of 2008-2009 and 2020. According to the authoritative organization, the worst is ahead. There is a 25% chance that economic growth will slow to less than 2% and a 15% chance that it will fall below 1%. As possible triggers for a transition to very bad scenarios, the IMF cites mistakes in the monetary policy of central banks, further increases in energy prices, a banking crisis in China, a new wave of the COVID-19 pandemic, or new global health problems.
Dynamics of global GDP
Source: Bloomberg.
The forecast for US GDP for 2023 is left unchanged, while among European countries, there are the most significant cuts in the projected growth. The International Monetary Fund believes that the euro-area economy will grow by just 0.5% next year, and winter next year will be more severe for Europe than the upcoming one.
In addition to the Bank of England’s decision to end the temporary asset purchase program and Andrew Bailey’s statement that pension funds have only three days left to finish rebalancing their positions, the IMF forecasts seriously concerned investors. These factors became another reminder of the impending recession, which should press down the US stock indexes.
Since 1957, earnings per share have fallen 18% on average during recessions, according to FactSet. Wall Street analysts expect a modest rise of almost 3% in the third quarter. The average drawdown of the S&P 500 during recessions is 24%. Over the past year, the broad stock index has lost only 17%. It has room to fall, strengthening the US dollar.
It is difficult to find a reason that would turn the USD trend down. Some analysts suggest that history could repeat itself with coordinated FX interventions along the lines of the Plaza Accord in 1985. However, this requires the participation of the Fed, which is now not interested in weakening the US dollar. According to the US Treasury Secretary, Janet Yellen, the dollar strength results from the monetary policy pursued by the world’s central banks. The dollar’s value is determined by the market and serves the US benefit.
EURUSD trading plan today
Therefore, the medium-term EURUSD trend will remain down. In the short term, the major currency pair could consolidate in the range of 0.9665-0.9775 ahead of the US inflation report.
Price chart of EURUSD in real time mode
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