With the US dollar losing its advantages and the European economy extremely resilient, it’s no surprise that banks and investment companies raise their EURUSD forecasts. Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
According to reliable Bloomberg sources in the Governing Council, the ECB is considering slowing down the rate of its deposit rate hike from 50 bps in February to 25 bps in March, despite Christine Lagarde’s claims of several half-point increases. EURUSD bulls decided to play it safe, fixing profits, which led to the pair’s fall below 1.08. Moreover, the US stock indices also fell after US banks’ profits declined.
The market has been increasingly responsive to corporate reporting, while its correlation to FOMC officials’ speeches and macroeconomic data is declining. The Fed officials’ mantra that the central bank’s job isn’t done yet doesn’t worry investors. They did not react violently to the releases of employment and inflation data. Previously, fluctuations in the value of financial assets were much wider.
Wall Street analysts’ lower Q4 forecasts could trigger an S&P 500 rally, depriving the US dollar of its safe haven advantage. Combined with the slowdown in the Fed’s monetary restriction against the backdrop of a US inflation slowdown, this will contribute to a further USD index decline. Especially when the global economy outperforms the US one, American investors tend to transfer their money abroad.
Dynamics of inflation and the USD
Source: Financial Times.
It is not surprising that major banks and investment companies are adjusting their EURUSD forecasts. Morgan Stanley raised its estimates from 1.08 to 1.15. JP Morgan experts do not believe that the pair will return to parity, assuming that it will end the year in the zone of 1.08-1.1. The consensus forecast shifted from 1.08 to 1.1, although back in October it was 1.05. ING claims that the events are forcing analysts to change their minds.
Dynamics of EURUSD and related consensus forecasts
Source: Bloomberg.
There are two reasons for optimism. The first is Chinese Vice Premier Liu He’s statement that China’s economic growth will return to its normal trend. The second is that German investor sentiment has turned positive for the first time since Russia’s invasion of Ukraine, according to ZEW. Goldman Sachs raised its forecast for China’s GDP for 2023 from 5.2% to 5.5%. This was facilitated by stronger data for the fourth quarter. German Chancellor Olaf Scholz, in turn, expressed confidence that Germany would avoid recession.
Weekly EURUSD trading plan
The slowdown in the Fed’s monetary restriction is not the only advantage of the EURUSD bulls. The uptrend remains. Use corrections towards 1.0745, 1.072, and 1.069 to switch from short-term short trades to medium- and long-term long trades.
Price chart of EURUSD in real time mode
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