When other central banks, following the Fed, start tightening monetary policy, the EURUSD bears are being held back. The dollar is pressed down by the US stocks rally and a drop in Treasury yields. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
The tailwind for the US dollar turns into a headwind, and markets expect a hawkish surprise from the ECB, the EURUSD bulls are going ahead even despite the rise in the US producer prices to 11.2% and aggressive speeches of the FOMC officials. The euro has been up above $1.09. Although Federal Reserve board member Christopher Waller says the central bank likely will hike short-term rates by half a percentage point, or 50 basis points, at its meeting in May and possibly follow it up with similar moves in the next several months, the greenback has weakened.
A rally in US Treasury yields and a drop in the US stock indexes support the US dollar. So, the greenback weakened ahead of the ECB meeting as the Treasury yields were down and the S&P 500 was up. Investors were thinking over the news that the pace of price increases probably has peaked, which means the Fed may not need to act that aggressively. The buyers of the US stocks were also supported by strong corporate reporting.
In general, the situation is developing like it is written in textbooks. The greenback strengthened on the expectations of the Fed’s monetary tightening start and should be weakening once the process has begun. On the one hand, the principle “buy the news, sell the facts” is being realized. On the other hand, central banks in other countries, following the Fed, are to start monetary tightening. For example, the Bank of Canada and the Reserve Bank of New Zealand have raised the interest rates by half a point, signalling that the Fed is losing its leading position, and the US dollar should be weakening against other currencies. The ECB meeting could also encourage the USD bears.
Amid the rise in the euro-area inflation rate to 7.5%, even the ECB doves understand the need to normalize the monetary policy. Bloomberg experts predict the QE completion in July and an increase in the deposit rate in December. If the European Central Bank intends to move faster, this will add arguments for buying the EURUSD.
It looks as if the EURUSD trend is about to turn up. However, an extra variable has appeared in the equation, the armed conflict in Ukraine, which discourages the euro buyers. The war in Eastern Europe is considered the primary risk for the euro-area economy.
Risk factors for euro-area economy
The connection is clear. According to estimates by economic institutions advising the German government, if the country refuses to buy Russian energy, the German GDP will lose €220 billion in the next two years. This is about 6.5% of the size of the economy. A recession looks inevitable. That is why Berlin resists the idea of an embargo.
Weekly EURUSD trading plan
So, both the euro and the US dollar have their pros and cons, and the trend will hardly radically change in the near future while the correction looks quite real. If the EURUSD breaks out the resistance at 1.093, one could consider entering short-term longs, following with sell trades if the price rebounds down from resistances at 1.098 – 1.1 and 1.102 – 1.104.
Price chart of EURUSD in real time mode
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