Reverse currency wars are not working. Instead of strengthening in response to rate increases, national currencies continue to fall against the US dollar. Without the Fed, this process is irreversible. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Monthly US dollar fundamental forecast
If earlier fears about a global recession were associated with excessive tightening of monetary policy and the energy crisis, then in September, new ones were added to them. According to the IMF, fiscal stimulus will send up inflation, accelerate the process of raising the BoE rate and exacerbate the downturn in the economy. Moody’s warns that unfunded tax cuts will negatively impact creditworthiness. The positions of European currencies are getting worse. The EURUSD is naturally falling.
After BoE Chief Economist Huw Pill said the government’s new debt-ridden economic plan required a significant monetary response, the futures market changed its rate expectations. It is now expected to reach a ceiling of 6.25% by May. Bond yields reacted with a boom, and bond sales spread to continental Europe and North America. As a result, 10-year Treasury yields, for the first time since 2010, exceeded the 4% mark. The S&P 500, sensitive to the yields trends, has been falling for six days in a row, which is the worst losing streak of the stock index since February 2020.
As a result, a paradoxical, at first glance, situation arises in Forex. By playing reverse currency wars, the Fed’s rival central banks are raising rates, but this increases the panic and, instead of strengthening national currencies, leads to their weakening against the US dollar. However, you need to understand that the Federal Reserve sets the tone. The US central bank is still the leader.
Changes in central banks’ interest rates
Source: Financial Times
According to Neel Kashkari, the current central bank will not repeat the mistake of its predecessors. Those, looking at the slowdown in inflation and the economy, stopped monetary tightening at the wrong time. Now this will not happen. St. Louis Fed president James Bullard called for the federal funds rate to be raised to 4.5% as soon as possible.
The Fed monetary policy supports the US dollar. And the situation is unlikely to change in the near future. According to Bank of America, a 10% rise in the USD index results in a 3% drop in earnings per share. The S&P 500 has room to fall, and the rise in demand for safe-haven assets associated with a decline in the stock index and global risk appetite will continue to strengthen the greenback.
The sabotage with the Nord Stream pipeline reminded Europe what a difficult winter awaits it. Bloomberg predicts the euro-area economy will shrink by 1% starting in the fourth quarter. If gas prices rise by another 50%, GDP will fall by 5%.
Forecasts for euro-area economy
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Source: Bloomberg.
Monthly EURUSDÂ trading plan
Thus, the US dollar benefits from a massive aggressive tightening of monetary policy, while the euro continues to weaken due to the energy crisis. EURUSD has room to fall, so hold down the shorts, adding up to them from time to time; the target is 0.92.
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Price chart of EURUSD in real time mode
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