The markets expected Jerome Powell to act hawkish, but saw only an indifferent person. As a result, the madness in the US stock market brought EURUSD above 1.1. Let’s discuss this topic and make up a trading plan.
Monthly Euro fundamental forecast
Madness. This is when you do the same thing in the hope of the opposite result. Since mid-2022, financial markets have been growing, hoping that the Fed will give the green light to their further rally. But the central bank continued to punish them. However, in the new year everything has changed. At the first FOMC meeting press conference in 2023, Jerome Powell tried to act hawkish, but the markets saw that the Fed head was not bothered by their actions. As a result, the February madness of US stock indices contributed to the EURUSD rise above 1.1.
Reaction of US stock indexes to Powell’s speech
Source: Wall Street Journal.
According to the Fed chairman, the regulator will need several more federal funds rate increases to make monetary policy more restrictive. Alas, this is no longer profitable for investors. The derivatives market still believes in another 25 bps borrowing costs increase followed by a 50 bps decline by the end of 2023. Derivatives are looking for a sharp rate cut in 2024 despite a modest Fed forecast of -50 bps.
The stock index rally was driven by the fact that the Fed does not know the future and its monetary policy is driven by data. It is worth noting that the 2021 central bank’s mantra that inflation will slow down on its own is beginning to come to life. Jerome Powell acknowledged that the disinflationary process had begun. Investors expected to see a hawk, but they saw a man who recognizes the price slowdown and is not very worried about the stock market rally and improving financial conditions because the Fed is not focused on short-term processes but on sustainable changes.
The Fed says it’s too early to talk about a victory over inflation, but admits that it is slowing down. According to the actual data, this is happening faster than in the euro area. Yes, the consumer prices growth rate in Europe decreased from 10.6% in October to 8.5% in January, but the rate is still more than four times higher than the ECB target. In addition, core inflation remains at a record high of 5.2%.
Inflation dynamics in the US and eurozone
Source: Wall Street Journal.
It is too early for the European Central Bank to change its decisiveness to caution. The futures market expects the ECB to raise the deposit rate by 50 bps in February and March, followed by a slowdown in monetary restriction to 25 bps in May. However, if Christine Lagarde hints at a few half-point steps, the euro could soar even higher. In the opposite case, there is a high risk of exiting EURUSD longs.
Monthly EURUSD trading plan
The pair reached the first of the previously set targets at 1.095 and came close to the second at 1.104. Therefore it is reasonable to do the same. In any case, the EURUSD uptrend remains while corrections serve as a great opportunity to buy a pair cheaper. It may reach 1.15 in 2023, and 1.2 in 2024.
Price chart of EURUSD in real time mode
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