Hope for the best, prepare for the worst. Investors were very worried about the crisis in Europe. However, when there were signs that it would not start, they began to buy EURUSD. Let’s discuss this topic and make up a trading plan.
Weekly Euro fundamental forecast
No matter how much speculators would like to trigger a EURUSD correction, divergences in monetary policy and economic growth require a continuation of the rally. The contrast between the eurozone, where the composite PMI rose above 50 for the first time since June, and the US economy, which started the new year weakly, is evident. Investors are waiting for continued growth from the ECB and are betting that it’s time for the Fed to gather strength. It seems that the time for a serious euro correction has not yet come.
The growth of European PMIs from the October bottom is closely related to the fall in gas prices and the reduction of the threat of an energy crisis. EURUSD felt relieved that the catastrophe would turn into a mild recession. Or there will be no recession at all.
Dynamics of eurozone PMI
Source: Financial Times.
As a result of the release of strong European PMI data, Forex reacted with a euro fall after traders exited longs when everyone buys. However, during the American session, the market realized that the time for a deep EURUSD correction had not yet come, all because of weak US PMI data. Despite the growth of the index from 45 to 46.6, it continues to be below 50, indicating a contraction of the economy. At the same time, the rate of its slowdown is the strongest since the global crisis of 2008-2009.
The fact that the US has started 2023 weakly forces investors to hedge against a too early Fed’s dovish reversal. The futures market signals that the federal funds rate will rise by 48 bps before the end of the cycle. However, what if its increase by 25 bps in February will be the last? In this case, the Fed will not tighten monetary policy any more.
Dynamics of the Fed’s projections
Source: Bloomberg.
At the same time, more and more members of the Governing Council insist on raising the deposit rate by 50 bps at the next two ECB meetings. It will rise to 3.25%, while the cost of borrowing in the US may not reach 5%.
The risks for EURUSD remained. On the one hand, when China’s economy opens, the export-oriented eurozone will benefit. On the other hand, the energy crisis may resume in Europe against the background of rising oil and gas prices. This is influenced by the Fed, which will still raise rates more than expected from it. Do not also forget about the delayed effect of the ECB’s monetary restriction on the eoruzone’s economy.
Weekly EURUSD trading plan
However, so far all these fears do not particularly bother euro buyers. Due to divergences in monetary policy and economic growth, EURUSD intends soon to reach the previously set targets of 1.095 and 1.104. The fact that the bulls managed to stay above 1.083 is proof of their strength and the basis for entering purchases.
Price chart of EURUSD in real time mode
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