After the November FOMC meeting, the Fed’s position became clearer, but what about the rest of the regulators? They are faced with a difficult choice, which affects their currencies. Let’s discuss the topic and make up a trading plan for EURUSD.
Monthly US dollar fundamental forecast
The pack leader intends to raise the rate to 5.15% after the November FOMC meeting, as the futures market expects. But what should the rest of the pack do? Should they continue the race at the risk of triggering recessions, or should they stop and not fight inflation? Christine Lagarde was the first to answer this question. According to her, the ECB does not believe that the upcoming recession in the eurozone will curb inflation. It looks like the ECB is ready to continue raising rates, which temporarily supported EURUSD. But it is unlikely that the intention of the European regulator to continue to follow the pack leader will save the euro.
Christine Lagarde explained the differences in economies and why the deposit rate will not rise as high as the federal funds rate. She noted that the US labor market is extremely tense, as the number of vacancies exceeds the number of unemployed almost twice, while in the eurozone the ratio is 0.3.
Dynamics of central bank rates
Source: Wall Street Journal.
The Fed needs to work hard to reduce employment growth to at least 100,000 a month in order to count on a slowdown in wage growth from 5% (expected in October) to 3-3.5%. The last figure is necessary to restore the balance of labor supply and demand and the final victory over inflation. The +200,000 nonfarm payrolls predicted by Bloomberg experts are too high to count on a pause in monetary restriction.
Dynamics of US nonfarm payrolls and the ratio of job openings to unemployed in the US
Source: Bloomberg.
The US economy will continue to slow down and move toward recession. However, this fact, together with the increase in the expected ceiling on the federal funds rate, tight monetary policy, and hot inflation, create headwinds for US stock indices. Their further decline worsens global risk appetite and maintains strong demand for the dollar as a safe-haven asset.
According to BNP Paribas, the maximum Fed rate will be 5.25%. TD Securities forecasts 5.5%, while Nomura expects the rate at 5.75%. The mix of high borrowing costs and increased demand for safe-haven assets will continue to strengthen the greenback. While currencies with negative current account balances like the GBP or NZD, or housing bubbles and over-indebtedness in large financial sectors like the CAD or AUD, will be under pressure.
Monthly EURUSD trading plan
As for EURUSD, the energy crisis terrorizing the euro is a common phenomenon. The IEA estimates that Europe could face a shortage of 30 billion cubic meters of gas next summer, which could trigger several recessions. The EURUSD downtrend will maintain for a long time. Strong US employment data for October will allow traders to add up to short trades towards 0.97 and 0.95.
Price chart of EURUSD in real time mode
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