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According to the World Bank, the recession is about to hit the global economy, but this does not contribute to the USD strengthening. Investors prefer to buy other safe-haven assets. Let’s discuss this topic and make up a trading plan for EURUSD.

Weekly US dollar fundamental forecast

In 2022, the financial world wondered when inflation would peak. In 2023, investors are worried about how fast it will decline. The sooner this happens, the less reason the central banks will have to continue monetary restrictions. The sooner they stop, the worse for the currency. In this regard, the current inflation dynamics in the US and the eurozone, together with a more hawkish ECB compared to the Fed, are strong arguments for the EURUSD rally continuation.

Inflation dynamics in the US and eurozone

Source: Financial Times.

The derivatives market predicts that the deposit rate will increase by 50 bps with an 80% probability at the Governing Council’s February meeting. Derivatives estimate the chances of a 75 bps rise at 20%, while investors believe that the Fed will increase borrowing costs by only 25 bps at the first meeting in 2023. The probability of a 50 bps increase is 1 in 5. The ECB is clearly moving faster than the Fed, which gives confidence to the EURUSD bulls.

At a bankers’ conference in Stockholm, Isabel Schnabel said the ECB would continue tightening monetary policy, while Jerome Powell preferred not to turn super hawkish. The Fed chairman says raising rates is an unpopular decision for politicians, but the central bank is independent.

Curiously, the upcoming recession no longer serves as a driver of the EURUSD decline. Investors prefer to buy other safe-haven assets, including the Japanese yen, Swiss franc, and gold, rather than USD in the face of declining Treasury yields. According to Jupiter Asset Management, 10-year Treasury yields could fall below 2% amid a Fed’s dovish reversal. In this regard, in response to the World Bank’s downgrade of 2023 global GDP forecasts to 1.7%, euro stability looks logical. The World Bank officials claim that a recession is about to hit the global economy while improving China’s estimates. This fact also strengthens the EURUSD.

European stocks, which have been on the rise lately, are more associated with China than US stocks. The German DAX and the French CAC 40 are up 18% over the past three months, while the S&P 500 is up only 8.5%. The flow of capital from the US to Europe is an important driver of the EURUSD rally.

Still, the pair’s dynamics will depend on inflation. If last year’s forecast about the temporary nature of high prices was wrong, then investors also can be mistaken about a quick return of PCE to the 2% target.

Dynamics of US inflation


Source: Bloomberg.

Weekly EURUSD trading plan

The factor of a significant slowdown in US inflation has been partially priced in EURUSD. This is bad news for the analyzed pair because if something goes wrong, it will collapse. However, as long as the market buys the rumor of a US CPI slowdown from 7.1% to 6.6% in December, it will be reasonable to enter long trades in the direction of at least $1.08.

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.

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