Markets have been looking for signs of a dovish reversal by the Fed for several months now, but time after time they are forced to set back. However, as the federal funds rate rises, the situation is changing. Let’s discuss the topic and make up a trading plan for EURUSD.
Weekly US dollar fundamental forecast
Global cooperation has been replaced by global sabotage. The UK harms other countries with financial market turmoil, while Japan threatens them with currency interventions that boost Treasury yields and slow down global GDP. The ECB is shocking its counterparts with aggressive rate hikes, angering Italy and France. However, the Fed is a “leader”. The tightening of monetary policy at the highest rate in 10 years will lead to a recession in the US and globally. This will definitely affect EURUSD.
Right now, everything is bad for the economy and financial markets, but good for the Fed. According to FactSet, U.S. corporate profits will rise 2.2% in the third quarter, the worst since 2020. However, this is good news for the Fed, as it indicates a reduction in domestic demand and a cooling in GDP. Ultimately, this should slow down inflation.
On the other hand, bad economic news is inspiring US stocks to act boldly. The market is trying to find reasons for the Fed’s dovish reversal. Despite a traditionally poor October and weak corporate earnings, the Dow Jones is expected to rise 14% this year, the best performance since January 1976. This supports the EURUSD, keeping the pair close to parity.
What can make the Fed change its plans? Will panic in the financial markets or a strong dollar be the reason? According to 44% of Bloomberg experts, stress will not prevent the central bank from completing the monetary restriction cycle. 38% believe that because of this, the Fed will start cutting rates earlier than expected. 18% predict that borrowing costs will not rise as high as expected.
The impact of financial market stress on Fed
Source: Bloomberg.
As for the US dollar, which has gained 13% since the beginning of the year, it will impact on the US economy and the Fed’s monetary policy, according to half of Bloomberg experts. 28% think differently.
The USD impact on the Fed’s monetary policy
Source: Bloomberg.
Thus, the confrontation between the financial markets and the Fed continues, which harms the US and global GDP. So far, US stock indices have been outpaced by the central bank many times, but the situation is changing as the federal funds rate rises. It’s one thing to try to catch up with inflation, but to realize that the cost of borrowing will be limited is another. The November FOMC meeting may become an inflection point.
Weekly EURUSD trading plan
Most likely, the Fed will raise rates by 75 bps to 4%, but this is not what investors are interested in. Will Jerome Powell signal a future reduction in the monetary restriction rate? If yes, the US dollar will weaken. In the meantime, before an important event, EURUSD consolidates in the range of 0.988-1.008. Thus, it would be profitable to sell the euro on the rise and buy on the decline.
Price chart of EURUSD in real time mode
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