Three times in the past three months, stocks and EURUSD tried to play against the Fed and failed. Now even the signs of a dovish shift do not encourage investors to buy the stocks or the euro. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly euro fundamental forecast
Financial markets are driven by Fear. Investors have already failed three times, trying to play on the idea of the Fed’s dovish shift. Now, they are unwilling to repeat the same mistake. Even the notes of restraint in the speeches of the FOMC officials do not encourage investors to buy the US stock indexes or EURUSD. It seems that only a recession could increase the demand for risky assets. The anticipation of death is worse than death itself.
If the Fed Vice Chair Lael Brainard said that previous increases in the federal funds rate and expectations of its further hikes affect the US economy with a time lag, sometime in August or September, the S&P 500 would certainly have jumped up. The same is true about Chicago Fed President Charles Evans’ speech that after bringing the federal funds rate to 4.5% in 2023, the central bank should pause to assess the consequences of monetary restriction. Nothing special seems to be in this phrase. However, given that the derivatives market bets on a ceiling of 4.7%, the tone could change to dovish.
Nonetheless, markets do not want to against the Fed anymore. Investors are reluctant to buy the S&P 500, and the EURUSD is naturally weakening. What can support the euro? Will the ECB hawks help? According to the president of the Dutch central bank, Klaas Knot, the European regulator must act decisively, taking two big steps at the next meetings. Currently, derivatives expect just one 75-basis-point interest rate hike, suggesting the ECB should slow down the pace of monetary tightening in the future.
Meanwhile, the European Central Bank’s own research suggests that core inflation in the euro area becomes increasingly dependent on domestic demand. This enhances the effectiveness of monetary tightening and could push Christine Lagarde and her team to continue aggressive monetary tightening.
Dynamics and structure of European inflation
Source: Bloomberg.
And yet, despite the same pace of monetary restriction, the ECB depends on economic performance, while the Fed is ready to sacrifice US economic expansion to take the inflation rate under control. That is why the EURUSD downtrend will remain strong.
Weekly EURUSD trading plan
In the short term, the EURUSD trend will depend on the US consumer prices report for October. According to Bloomberg, the US CPI will slow down to 8.1% from the previous reading of 8.3%. Core inflation, conversely, will rise from 6.3% to 6.5%. Such opposite trends in August crashed the S&P 500 and EURUSD in September. At present, investors worry that that situation will repeat, and the euro is falling even before the important report. On the eve of the publication, the pair should consolidate in the range of 0.964-0.974, and come traders could exit the shorts entered earlier.
Price chart of EURUSD in real time mode
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