The US economy is hotter than previously expected. The Fed needs to act more aggressively to cool it down. This circumstance, coupled with the permanently high demand for the dollar as a safe-haven asset, is pushing EURUSD down. Let us discuss the Forex outlook and make up a EURUSD trading plan.

Monthly US dollar fundamental forecast

For many months now, financial markets have wanted the Fed to turn dovish. However, the Fed wants the stock market to drop. The regulator needs tighter financial conditions to curb inflation. He, who plays against the Fed, will always lose. That is why the EURUSD bears go ahead.

A further drop in the US stock market is not the only shock that strengthens the demand for the dollar as the main safe-haven asset. According to Chicago Fed President Charles Evans, too high rates could have a “nonlinear” impact on the US economy. If the Fed has to increase the path of the funds rate much more, it really does begin to weigh on the economy. Evans says he hopes that the expected FOMC ceiling of 4.6% will be enough to beat inflation, but so far, the economic data mean the opposite.

Previously, when the Fed began tightening monetary policy, it took longer than originally thought. It is likely that, due to entrenched high prices, monetary restrictions in the United States will last until the end of 2023 and possibly into 2024. Moreover, the US economy is actually more stable than expected. It’s more overheated, as evidenced by Fed lowering potential GDP. It has become easier to close the gap between the potential and the actual level, which means that the central bank will need more effort to cool the economy.

Dynamics of US real GDP and unemployment

  

Source: Bloomberg 

According to Minneapolis Fed President Neel Kashkari, the price of not fighting inflation is unacceptable. The risks of doing too little to bring the PCE back to the 2% target are higher than the risks of going too far by raising the federal funds rate too high.

Dynamics of US inflation

Source: Bloomberg

Following the Fed, other central banks tighten monetary policy. The release of hot inflation data in New Zealand, the UK, and Canada increased the likelihood of an impending global recession, which supported the US dollar as a safe-haven asset.

Thus, the turmoil in the financial markets amid falling gas prices in Europe and the refusal of the new UK government from large-scale fiscal stimulus has not ended. US stock indices have room to fall, and central banks, following the Fed, have room to tighten monetary policy. All of this is driving the downturn in the global economy and keeping the demand for the greenback high.

Monthly EURUSD trading plan

The EURUSD downtrend will hardly reverse, although the ECB officials call for interest rate hikes by 75 basis points at each of the two remaining meetings of the Governing Council this year, and the euro-area inflation is at a record high. It is still relevant to sell the EURUSD down to 0.95.

 

 

Price chart of EURUSD in real time mode