A quarter or a half of a point? How much will the Fed raise the rates in February? The derivatives market bets on a quarter. FOMC officials are hesitant and weighing the arguments. Investors are looking forward to the inflation report. Let’s discuss this topic and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

The USD downtrend has begun! Deutsche Bank’s loud statement contradicts the majority opinion that EURUSD should fall in the first quarter and then rise to 1.08 by the end of the year. However, the crowd gets it wrong from time to time and traders are used to looking at the chart. And the chart shows that the euro-dollar rise is real, unless, of course, the euro bulls are discouraged by the US inflation report.

Data dependency policy in action! More and more FOMC members are tying their decisions to the incoming data. One of the Fed’s top hawks, Atlanta Fed President Raphael Bostic, said that if consumer prices continued to slow in December, he would take a 25-basis-point federal funds rate hike more seriously in February. San Francisco Fed president Mary Daly finds arguments in favor of a quarter and a half point, but everything will depend on the incoming data.

While officials are hesitant, the derivatives market has increased the likelihood of a 0.25-point rate hike at the first FOMC meeting in 2023 to 78.7%. In contrast to the commitment of the Fed’s officials to the idea of raising the rate above 5%, derivatives signal a lower figure. The derivatives market predicts that the federal funds rate will not reach this mark and will start to decline in the second half of the year.

Likelihood of Fed’s rate hike by 25 and 50 basis points


Source: CME Group.

Thus, investors continue to ignore the opinion of the Fed, which states in the minutes of the December meeting that there will be no dovish shift this year. Why? I guess it’s a matter of trust. It is hard to earn but easy to lose. Earlier the central bank struggled with low inflation and the markets were sympathetic to its steps to stimulate the economy. However, after making a mistake once, arguing that inflation would decrease on its own, the confidence in the Fed was undermined.

Investor skepticism about the Fed’s rhetoric deprives the US dollar of the important benefit — expectations of the federal funds rate to skyrocket. Other bullish drivers also stopped working. Risk appetite amid the opening of the Chinese economy and lower gas prices in Europe is growing by leaps and bounds. The US economy is strong, but the growth rate is slowing down. In addition, amid easing energy crisis, the euro-area economy grows stronger.

The fall in the European unemployment rate to a record low, the rise in the Sentix market sentiment index for the third month in a row to the highest value since June 2022 and the faster expansion of industrial production in Germany than expected, suggest a shallow and short-lived recession in the euro area.

Dynamics of euro-area unemployment 

Source: Financial Times.

Weekly EURUSD trading plan

I suppose the Fed’s policy will be determined by the US inflation report. The EURUSD is rising amid the expectations that the inflation slowed down to 6.6% in December. Furthermore, the euro is supported by the opening of the Chinese economy and strong economic data in the euro area. Until the euro goes below $1.069, it will be relevant to buy. One could also add up to the longs entered at the indicated level.

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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