Although the Fed officials say that the regulator hasn’t yet reached its targets, markets still expect the federal funds rate cut in 2023. How will this affect the euro? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly euro fundamental forecast
At the beginning of 2022, the Fed was accused of tightening monetary policy too slowly. At the end of 2022, there is a lot of criticism because the rate has been raised too fast. The UN even calls for putting the process on pause, since otherwise, the world economy will face an inevitable recession. At the same time, financial markets continue to count on the Fed’s dovish shift in 2023, and their hopes and disappointments cause the EURUSD to jump up and down.
Although most Fed officials call for continuous monetary tightening, derivatives still believe in the federal funds rate cut by 25 basis points in 2023, and at least 50 basis points in 2024. This assumption encourages investors to buy risky assets, including the US stock indexes, from time to time.
Dynamics of Fed rate and expected changes in 2023-2024
Source: Bloomberg.
However, Fed officials openly say investors are absolutely wrong to count on a dovish shift. Atlanta Fed President Raphael Bostic says the markets are set to see a rate cut in 2023, but the Fed won’t change its monetary policy outlook so fast. The President of the Federal Reserve Bank of San Francisco, Mary Daly, doesn’t suggest any changes in the aggressive monetary tightening course next year.
Don’t believe the words until you see the facts. Investors continue buying the EURUSD on week US domestic data and sell on good economic news. ISM reports stronger US services PMI data than Bloomberg experts expected. The ADP private employment report suggests an increase of 208 000 new jobs. The US trade deficit contracted from $70.5 billion to $67.4 billion. These factors became the chief drivers of the drop in the S&P 500 and the euro.
The Fed’s determination and high demand for the US dollar amid the strongest financial stress since March 2020 mean that the EURUSD downtrend will remain strong. For the first time in 20 years, Reuters experts predict that the euro will be quoted below parity with the greenback over the half year, after which it will rise to $1.03 in six months.
Dynamics of financial stress index
Source: Financial Times.
The EURUSD trend won’t turn up until the global economy outperforms the US one, and this is far from reality now. The number of new cases of COVID-19 in China has reached monthly highs, and the energy crisis continues in Europe. As a result, the WTO cuts its global GDP forecast for 2023 from 3.3% to 2.3% and notes that global trade will grow by 1% instead of the expected 3.3%.
Weekly EURUSD trading plan
Therefore, the EURUSD long-term downtrend remains strong. In the short term, the market game against the Fed could result in an upward correction. Much will depend on the US jobs report. As long as the euro-dollar is trading in the range of 0.985-1, it makes sense to trade intraday.
Price chart of EURUSD in real time mode
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