The US dollar looks invincible. However, when new drivers appear, the market situation can radically change. Investors believe that it makes sense to sell the USD at the end of the rate hiking cycle. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly euro fundamental forecast
The euro is rising! The EURUSD has hit the highest level over the past six weeks, although the Treasury yield is down, and the US stock indices have dropped amid weak corporate reports of such giants as Alphabet and Microsoft. The main reason is…the Bank of Canada, which added 50 basis points to the overnight rate instead of the 75 basis points expected by the derivatives market and started talking about the end of the monetary tightening cycle. If so, the Fed could do the same. Is it time to sell the greenback?
Central banks are known to repeat each others’ actions. The Fed usually sets an example, but when other central banks start acting less aggressively, the Fed could also slow down. Investors now expect a slowdown or even the end of the global monetary tightening cycle, which supports risky assets and presses down safe-haven assets. At the same time, markets perceive the dovish shift not as peaking or falling rates but as a slowdown in the pace of monetary tightening.
Obviously, both the Reserve Bank of Australia and the Bank of Canada worry about the stability of their national economies. Rising rates affect them with a time lag, so to avoid a recession, they should not go too far. The same is true for the Fed because, according to the bond market indicators, the recession is getting closer and closer. Finally, the Fed-tracked yield curve for 10-year bonds and 3-month bills has inverted. When the yield curve is below zero, it also signals the near end of the federal funds rate hikes cycle.
Dynamics of US yield curve
Source: Bloomberg.
Of course, the euro would have risen so high but for the expectations of the ECB meeting and the easing of the energy crisis, which lowers the risks of a recession in the euro-area economy. Unusually warm weather, the associated reduction in demand for gas, heavy LNG imports, and a 94% increase in storage occupancy in the EU have sent down the gas prices by 70% from August highs. Inflation could also go down, and the recession in the euro area could be averted.
The ECB also contributed to the EURUSD rally. The regulator is willing to raise the deposit rate by three-quarters of a point and start unwinding the balance sheet, which has ballooned to €8.8 trillion. This is seen as a bullish factor for the euro. Investors also expect the Governing Council to increase the borrowing costs at the ECB December meeting because of some officials’ hints.
Weekly EURUSD trading plan
The ECB’s hawkish actions must have been priced, fully or partially, in the EURUSD quotes. Therefore, investors might start selling the euro on the facts after buying the news. If the price goes below the support at 1.002, one could consider entering shorts. On the other hand, investors could be cautious and wait for the Fed’s meeting in early November, which gives a reason to buy the euro up to $1.011 and $1.015 in the short term.
Price chart of EURUSD in real time mode
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