Fundamental analysis. No matter how many ultimatums the Fed gives to the markets, the final decisions of the US central bank will depend on incoming data. Let’s discuss this topic and make up a trading plan for EURUSD.
Weekly US dollar fundamental forecast
“Don’t even think we will start cutting rates in 2023.” This is the meaning of the Fed’s message to investors from the minutes of the December FOMC meeting. Unjustified easing of financial conditions, especially caused by the public’s misconceptions about the central bank’s reaction to economic events, will complicate its efforts to restore price stability. This is terrible news for risk-takers and EURUSD.
Any recovery in the market that could ease financial conditions would be a headwind for the Fed. It will force the central bank to raise rates higher than expected or hold them higher for longer than financial markets predict. Jerome Powell and his colleagues are basically telling investors to forget about lowering borrowing costs in 2023. This confirms Minneapolis Fed President Neel Kashkari, saying that the central bank will have to raise the federal funds rate by 100 bps at the next meetings to 5.4%, as too it is too early to admit that US inflation has reached its peak.
FOMC forecasts for the federal funds rate
Source: Bloomberg.
The IMF holds the same opinion. Its officials believe that US inflation has not changed yet, so it is too early for the Fed to declare victory over high prices. The strength of the labor market and the strength of the CPI in the service sector indicate that the inflation rate is still unchanged. The central bank needs to keep raising rates despite the recent price slowdown amid the most aggressive monetary restriction in decades.
A similar situation occurred in the second half of 2021 when Fed officials discussed tightening monetary policy. Then the main mantra was based on slowing down inflation on its own without any bold actions by the central bank. In fact, the borrowing cost has increased by 425 bps instead of the expected 75-100 bps in 2022.
Jerome Powell and his colleagues really wanted to scare investors with the December FOMC minutes. It didn’t turn out very well. The EURUSD remained around 1.06. Markets are well aware that everything will depend on incoming data. Can the Fed avoid a recession? Has inflation passed its peak? Everything will depend on December PMI and inflation data.
Bears should not rejoice ahead of time because of the slowdown in CPI growth in Europe. Core inflation continues to be elevated, so the ECB’s decision to raise the deposit rate by 50 bps at the first meeting in 2023 looks very likely.
Dynamics of European inflation
Source: Bloomberg.
Weekly EURUSD trading plan
Further EURUSD dynamics will depend on the US jobs report. If it is strong enough, the pair will drop below 1.05. For now, all that remains is to wait.
Price chart of EURUSD in real time mode
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