When the global economy is gradually recovering, the Fed is slowing down, and the ECB is still determined to act boldly. In such conditions, EURUSD has no choice but to rise. Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
The euro is the currency of optimists. Optimistic news came from the International Economic Forum in Davos, the IMF seems to be going to raise the global GDP forecasts, China is opening up the economy, the eurozone hopes to avoid a recession, and various assets signal a reduction in the risks of a US economy downturn. In such conditions, the EURUSD rally is not surprising. Moreover, the Fed resembles a dog that barks, but does not bite. FOMC officials talk about unfinished work, but at the same time they are ready to slow down the monetary restriction speed.
Back in December, experts surveyed by Consensus Economics predicted that a recession would begin in the eurozone. In January, their estimate of 2023 GDP rose to +0.1%. The forecasts of Capital Economics have changed radically, as government support turned out to be more extensive, and the automotive sector recovered faster than expected. According to UBS, the probability of a recession in the eurozone economy has decreased from 90% to 30%. JP Morgan raised estimates of eurozone GDP growth for the current year to +0.5%, as gas prices fell to €76 per MWh, instead of the previously forecast €155 per MWh.
Dynamics of eurozone GDP
Source: Financial Times.
The super resilient European economy allows the ECB to continue to aggressively raise rates. According to the head of the Bank of the Netherlands, Klaas Knot, the cost of borrowing will be increased by 50 bps at least at the next two meetings of the Governing Council, as the regulator focuses not on CPI, but on core inflation. Which does not produce good news. Christine Lagarde notes that the opening of China is a huge advantage for the global economy. However, it may provoke a new round of price growth, so the ECB should remain resolute in the fight against inflation despite the CPI slowdown.
Dynamics of eurozone inflation
Source: Bloomberg.
The futures market predicts that the deposit rate will rise from 2% to 3.25% in 2023. The ECB is moving at a faster rate than the Fed, which will increase the cost of borrowing from 4.5% to 5%. MUFG notes that the Fed’s reduction in speed eliminates the big advantage of the US dollar and increases the possibility of a EURUSD rally to 1.12 by the end of the year. The company’s experts believe that the deterioration of weather conditions in Europe may shake the euro positions.
The focus of Fed officials on raising the federal funds rate by a quarter point in February inspires US stock indexes to feats. This improves financial conditions and can provoke the wrath of the central bank. Nevertheless, when annual inflation expectations remain fixed at 2%, the Fed is unlikely to go out of its way.
Weekly EURUSD trading plan
The growth of optimism about the prospects of the European and global economy, as well as the outpacing speed of the ECB’s monetary restriction compared to the Fed, contribute to the EURUSD growth to the previously designated targets of 1.095 and 1.104. I recommend continue purchasing.
Price chart of EURUSD in real time mode
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