The underestimation of the Fed’s monetary restriction and the US economy cost EURUSD dearly. The rising chances of a federal funds rate hike to 5.25% or more allowed the bears to strengthen. Let’s discuss this topic and make up a trading plan.
Weekly Euro fundamental forecast
In order to survive in the market, it is necessary to change your stance from time to time. Thanks to the January US employment data, the markets very quickly changed their minds about the Fed’s monetary policy. They now fully agree with the FOMC’s forecast of a peak federal funds rate of 5.1%. Before that, they assumed that it would not reach such a figure. Thus, the better the understanding between investors and the central bank, the better for the EURUSD bears.
In 2022, booming markets were driven by expectations that the Fed would either raise rates lower than it expected or cut them before the end of the year, which also did not correspond to the FOMC forecast. Jerome Powell did not dissuade investors, saying that everyone has the right to their opinion. However, employment growth of 517 thousand in January forced the markets to change it. The implied borrowing cost ceiling rose from 4.91% before the data release to 5.12% afterward. Derivatives see a 25 bps hike in March as a done deal, and its rise in May looks very likely. Moreover, there are chances that the central bank will not remain passive in June. Three acts of monetary restriction is already a 5.5% growth. This a very impressive figure and great news for the US dollar.
Dynamics of Fed projections
Source: Bloomberg.
Atlanta Fed President Rafael Bostic contributed to the EURUSD decline. According to him, if a stronger-than-expected economy remains, the central bank will have to hike rates higher (by 25 bps on top of two quarter-point increases) than the forecast suggests. The option of 50 bps growth at one of the FOMC meetings is not excluded.
Although the market believes in monetary policy easing by the end of 2023, it has postponed the expected reduction in borrowing costs to a later date. So the chances that it will stay at or above 5% by September have increased from less than 50% to 75%.
The higher the federal funds rate’s actual ceiling, and the longer it remains so, the better for EURUSD sellers. US employment data is unlikely to drastically change the medium- and long-term prospects for the main currency pair. However, the bearish activity could increase if US inflation unexpectedly accelerates from its current 6.5%.
Weekly EURUSD trading plan
The markets have underestimated the Fed and the US economy, for which they have to pay. Although the reaction to important data looks too emotional. Investors need to calm down. As a result, EURUSD will enter a short-term consolidation in the range of 1.06-1.085. Thus enter long trades when the price rebounds from support at 1.069 or convergence zone of 1.058-1.0605.
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.