Before you stop, you should slow down. That is why investors start selling off the US dollar at any sign of a slowdown in the Fed’s monetary tightening. Are they right this time? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
Markets are so tired of Fear that they see any news as positive. Rishi Sunak took over as the UK Prime Minister, the US PMI report is weak, and the federal funds rate could be raised by 50 basis points in December. Investors still expect the Fed dovish shift, and any sign of less aggressive monetary tightening is seen as a reason to buy the EURUSD.
86 out of 90 Reuters experts expect the federal funds rate to increase by 75 basis points in October, most of them are set for +50 basis points in December, which is perceived by the market as a sign of a slowdown in monetary restriction pace. After a strong inflation report, derivatives leaned towards a 75 basis-point hike at the last FOMC meeting in 2022. However, by the end of October, the chances that the Fed would raise rates by half a point jumped from 34% to 43%. Their further growth will encourage the EURUSD bulls.
At the same time, the markets, as happened quite often this year, could be wrong. The Fed’s slowdown in monetary policy tightening does not mean a pause or a dovish shift. In order for the central bank to suspend hiking rates, according to Reuters experts, it is necessary to reduce the inflation rate by almost half, from the current 8% to 4.4%.
At the same time, the market remains hopeful that not only the slowdown in consumer prices, but also the approaching recession will force the Fed to reconsider its policy. The US PMI has been down for the fourth month in a row. Furthermore, the manufacturing PMI has fallen at the fastest pace since 2009, if we don’t consider the peak of the COVID-19 pandemic in 2020. So, there is an additional driver for the rally in US stock indices. After all, investors still stick to the principle “bad news for the economy is good news for markets.”
In this regard, the muted reaction of EURUSD to the weak PMI reports in Germany and France, which fell short of Bloomberg’s forecasts, should not be surprising. Investors know that in Europe, things, to put it mildly, are not very good. German GDP is likely to show a 0.2% Q-o-Q contraction in the economy, and the PMI data convince of a recession.
Dynamics of euro-area PMI
Source: Bloomberg.
In fact, the weakness of PMI around the world is a sure sign of an imminent recession, which should increase the demand for the US dollar as a safe-haven currency. At the same time, the rally in US stock indices and the rise in global risk appetite amid Rishi Sunak coming to power in the UK discourage the EURUSD bears. At least for now.
Weekly EURUSD trading plan
The euro continues to rise, also because of expectations of a 75-basis-point increase in the ECB deposit rate. Some analysts even suggest the launch of QT in Europe. At the same time, the Fed’s rate ceiling is still very far away, that is why the EURUSD rise is a temporary correction. It is relevant to sell the pair on the price rise to 0.992, 0.996 and 1.
Price chart of EURUSD in real time mode
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