Dollar bets on Fed. Forecast as of 12.04.2022

Fed is willing to press down the inflation rate, having accelerated to 40-year highs. Expectations of the Fed’s aggressive monetary tightening send up the Treasury yields and press down the US stocks. Where will the EURUSD go? Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

The dollar strengthens as investors worry about the repetition of the taper tantrum of 2013. The 10-year Treasury yield is rallying up, hitting the highest level since 2019, stocks are falling, and the global risk appetite declines. Investors are cautious amid FOMC officials’ hawkish comments, a downturn in the Chinese economy because of the COVID-19 outbreak, and a rise in the US inflation to 8.4%, the highest level since 1982. Bloomberg experts predict a surge in consumer prices to 1.2% M-o-M. This is the greatest surge since 2005.

Dynamics of US inflation

Source: Bloomberg 

How will the Fed react? The US central bank demonstrates a strong will to curb inflation. Will it succeed? Economists believe in Fed, but consumers doubt it. According to the consensus forecast of Wall Street Journal experts, by the end of 2022, consumer prices in the US will slow down to 5.5%, by the end of 2023 – to 2.9%. On the contrary, annual inflation expectations from the New York Fed continue to grow. In February they were 6%, in March — 6.6%. Such a trend signals that the Fed will fail. The inflation expected by consumers in March 2025 is 3.7%.

Anyway, the Fed should act aggressively, even such a dove as Charles Evans supports this idea. The Chicago Fed president says a half-percentage point increase in the Fed’s benchmark rate “is obviously worthy of consideration.” The federal funds rate should be in the 2.25-2.5% range by the end of the year. After that, the Fed should pause to see the results. It is higher than the FOMC median gauge of 1.9% in March.

Fed’s projections for interest rates

Source: Bloomberg

84% of Wall Street Journal experts believe that the Fed will raise the rate by 50 basis points in May. 57% of economists predict it will happen at least twice in 2022. The derivatives market bets on the 50-basis-point increases in the federal funds rate at the next two FOMC meetings, in May and June. Furthermore, the US dollar is supported by the balance sheet unwinding by $1.1 trillion a year, the uncertainty around geopolitics, and the risks of a downturn in the Chinese and global economies.

In the short term, the euro could be supported by the ECB meeting. Considering a rise in the euro-area inflation to 7.5%, almost four times higher than the target, most ECB policymakers should vote for the monetary tightening. The matter is how fast they should do it. The ECB is likely to quit the QE in July and start raising the interest rates in September.

Weekly EURUSD trading plan

After all, I don’t believe Christine Lagarde’s hawkish comments will encourage the EURUSD bulls, as the US Treasury yields are rallying and the stock indexes are falling. Therefore, I suggest selling the pair on corrections up. Hold down short positions entered at level 1.093 and add up to them if the price breaks out the support at 1.084.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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