Euro is afraid of parity. Forecast as of 07.03.2022

Different nature of the inflation in the USA and euro area contributes to the divergence in monetary policy of the Fed and the ECB. The Fed can afford to raise rates six or seven times in 2022, the European Central Bank is forced to take a timeout. How does this affect the EURUSD? Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

A strong US jobs report and the talks that US is discussing with its allies an embargo on Russian oil allowed Brent to closely reach $140 and pushed the EURUSD towards parity. Investors actively discuss this idea. Bloomberg models suggest the chance that the euro will cost the same as the US dollar has increased over the past month from 2.4% to 11.9%. Considering how quickly targets, indicated in previous forecasts, are being reached, this should not be surprising.

The closer to Russia and Ukraine, the more problems you will have. Despite the fact that both the USA and the euro area are facing record high inflation in decades, its nature is different. Yes, there are supply chain difficulties in the USA, but a significant part of the increase in CPI and PCE is associated with domestic demand. To combat the recession, the White House and Congress allocated about 25% of GDP in fiscal stimulus, while in Germany — 13.6%, and even less in France, Italy and Spain. As a result, inflation-adjusted consumer spending in the United States is 12% above pre-pandemic levels, the German indicator fell, the French remained at the same level.

The USA is much less threatened by recession and stagflation than the euro area. The fact that the US inflation acceleration is based on domestic demand allows the Fed to tighten monetary policy with a clear conscience. Furthermore, the US unemployment fell to 3.8%, nonfarm payrolls added 678,000 and wages increased by 5.1%. The derivatives market bets on a 140-basis-point rise in the federal funds rate in 2022.

Dynamics of US employment and unemployment

Source: Bloomberg

The nature of European inflation is different. Its main driver is the supply of goods and services, which the ECB cannot influence. In particular, a third or more of the increase in CPI over the past few months was due to energy prices. They continue growing due to the war in Ukraine, which simultaneously presses the GDP down and pushes the inflation up. Simply put, the euro area is facing a threat of stagflation. Moreover, the idea of the US exclusivity is again discussed by investors. Therefore, the EURUSD is being sold, moving towards parity.

The conflict in Eastern Europe continues and the US inflation could rise from 7.5% to 7.9%. Besides, the ECB is likely to take a timeout at its meeting on March 10 and maintain the current monetary policy unchanged because of the situation in Ukraine. Thus, the euro downtrend should strengthen. Investors wanted Christine Lagarde and her colleagues to clarify the future of the European QE, however, the geopolitical situation will set them back.

Weekly EURUSD trading plan

The euro bulls could be supported by the US stock indexes, namely, the capital inflows to the US equity market. If the EURUSD bulls consolidate in the zone of 1.089 – 1.091, the price could continue trading sideways. Otherwise, the market will continue falling towards 1.0655.

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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