If the rate hike affects the US economy only in 2023, then a recession is inevitable. If most of the negativity has already been taken into account, then the chances of a soft landing are very high. How does the time factor affect EURUSD? Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
While investors are waiting to see how Jerome Powell will resist market optimism after raising the federal funds rate by 25 bps, the Fed faces a completely different problem. The US central bank will have to assess the time lag of monetary tightening affecting the US economy. A correct answer or a mistake in solving this question can radically change the EURUSD fate.
Markets believe that the lag is long. That is, the consequences of last year’s aggressive monetary restriction are just beginning to affect the economy. The impact of high rates will be most evident in 2023, during which the recession will hit the US, and the Fed will make a dovish reversal. Goldman Sachs, on the contrary, is confident that the time lag is narrow. The biggest blow to the US economy was dealt in 2022. In 2023 it is going to avoid a recession. If so, the Fed can raise the borrowing cost to 5% or higher and keep it there for a very long time.
In any case, the monetary tightening has already caused retail sales to decline in three of the last four months, falling home sales to the lowest levels since 2014 and leading to the worst automotive industry performance in a decade. Consumer activity, which accounts for 70% of US GDP growth, is also declining. The labor market remains the only hope before the approaching recession, but mass layoffs at Amazon, Goldman Sachs, and Microsoft suggest that this will not last long.
American exceptionalism no longer has an effect, which, against the background of an increase in the IMF forecast of global GDP growth for 2023 from 2.7% to 2.9%, weakens the USD position. The current estimate is lower than 3.4% in 2022, but the organization’s analysts are confident that the global economy will reach the bottom this year. It looks more stable due to the opening of China’s economy, Europe’s adaptation to the energy crisis, the fall of the USD index and the improvement of financial conditions.
World GDP dynamics and forecasts
Source: Bloomberg.
China’s booming economic recovery has a twofold impact. On the one hand, this has led to increased production, fewer supply chain disruptions, and increased consumer demand. On the other hand, it caused an increase in the prices of oil and other raw materials, which will restrain global GDP. Still, the IMF assesses China’s influence as a boon for the global economy. Its positive dynamics lead to an outflow of capital from the United States and weaken interest in the greenback as a safe haven currency.
Weekly EURUSD trading plan
If we forget another advantage, the Fed’s aggressive monetary restriction, it becomes clear that the USD time has passed. Any EURUSD decline should be perceived as a correction. No matter how much Jerome Powell would like to strengthen the rally of US stock indices, the euro strengthening is inevitable. In this regard, enter long trades when the price rebounds from the supports at $1.0795 and $1.078, as well as when the pair returns to the range of $1.083-1.093.
Price chart of EURUSD in real time mode
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