The inability of EURUSD to break out the level above 1.09 indicates that many bullish factors have already been taken into account. Investors think that the ECB is unable to surprise them, which increases the correction possibility. Will Christine Lagarde be able to make a bold move? Let’s discuss this topic and make up a trading plan for EURUSD.
Weekly Euro fundamental forecast
Jerome Powell wants to go down in history as a man successfully fighting the highest inflation, as ex-Fed Chairman Arthur Burns did, and not provoke a recession in the US economy like Paul Volcker. Markets are responding well to the idea of a soft landing, which is facilitated by the stability of the economy against the backdrop of slowing inflation. In December, the growth rate of the underlying PCE decreased from 4.7% to 4.4%, which makes the chances of raising the federal funds rate by 25 bps in February extremely high.
Dynamics of inflation and PCE in the US
Source: Bloomberg.
According to CME Derivatives, there is a 92% chance the Fed will raise the borrowing cost by a quarter point twice in the first half of the year. There is also an 82% chance that rates will be lowered at least once by December. In fact, the fear of repeating the mistakes of his predecessors is likely to keep Jerome Powell from a dovish reversal. Thus, expect monetary policy easing only in the event of a recession.
The ECB’s position is not so transparent. According to derivatives, a 50 bps increase in the deposit rate will occur in February and in March. However, the opinion that the cost of borrowing will decrease by the end of the year looks erroneous. More sustained high inflation in Europe compared to the US makes Societe Generale forecast a peak rate of 3.75%, not 3.25%, as investors expect. Christine Lagarde’s confrontation with the markets in the week ending February 3 seems to be a much more interesting event than the Fed’s verdict.
Moreover, inflation data and eurozone GDP data will be published before an important event. The stability of European economies and a slow decline in consumer price growth are reasons for the ECB head to be hawkish. In Davos, Christine Lagarde has already suggested that traders expecting a dovish reversal reconsider their views. Now the ECB’s punishment of financial markets may be much stronger.
Dynamics of eurozone inflation
Source: Bloomberg.
The Fed and ECB meetings are not the only important events at the turn of January and February. The US jobs report will be published at the end of the week. Bloomberg experts predict an unemployment increase to 3.6%, a slowdown in employment growth to 185 thousand and a wage growth decrease to 4.3%. The latter indicator is extremely important for the Fed. If it continued to expand by 5-5.5%, then with 1-1.5% GDP growth, it would be almost impossible to return inflation to the 2% target.
Weekly EURUSD trading plan
Thus, this week will be extremely important and also marked by increased Forex volatility. Before the Fed meeting, stick to EURUSD purchases if the price falls below 1.083 followed by a return to the range of 1.083-1.093. On the contrary, the inability of the bulls to increase the pair’s rate above the resistance of 1.093 makes sales reasonable.
Price chart of EURUSD in real time mode
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