The Fed’s data-dependent policy has increased the EURUSD’s sensitivity to macrostatistics. However, basing trading decisions solely on the latest data may lead to mistakes. Let’s discuss this and make a trading plan.
The article covers the following subjects:
Highlights and key points
- Data sensitivity drives volatility for the U.S. dollar.
- The greenback has been overreacting to recent data releases.
- An eventual return to deflation threatens the euro’s value.
- Selling EURUSD on a rise with a target of 1.085 could be the best strategy.
Weekly fundamental forecast for dollar
2024 has seen the U.S. dollar in a “hot and cold” state. Early in the year, the dollar struggled as the Fed signaled a shift to looser monetary policy. Despite this dovish stance, EURUSD quotes collapsed to a six-month low in mid-April 2024. They are falling again, as the Fed’s quick start of monetary expansion in September dampened enthusiasm for selling the dollar.
Following strong U.S. labor market data and accelerating inflation in September, the likelihood of another 50 basis-point increase has almost dropped to zero, as has the chance of the federal funds rate reaching 3.25% by mid-2025. Yet, as autumn began, the probability of this rate level had climbed to nearly 80%.
Probability of the Fed’s rate below 3.25%
Source: Wall Street Journal.
What is the reason behind such transformations? Why does the greenback often ride a roller coaster, along with the Fed’s chances of lowering borrowing costs? The reason is the central bank’s dependence on data, which has reached a near-obsessive level for investors. It’s been a while since markets showed such high sensitivity to statistics. Changes in data have impacted the economic surprise index, the EURUSD dynamics, and investors’ expectations for the federal funds rate.
Economic Surprise Index trends
Source: Wall Street Journal.
In the summer, the U.S. economy seemed to be losing momentum; however, September’s data allowed the Atlanta Fed’s leading indicator to raise its third-quarter GDP forecast from 2% to over 3%.
The problem is that markets react to the latest data, akin to navigating by looking in the rearview mirror. You can’t drive like this for long. It’s crucial to look ahead, at least to account for the fact that inflation would likely be higher under Donald Trump than Kamala Harris. That’s the opinion of 68% of Wall Street Journal experts.
It’s worth noting that data dependency affects not only the Fed but also the ECB. In September, Frankfurt had no plans to cut the deposit rate the following month, but now, its drop to 3.25% at the October 17 meeting looks like a done deal. The issue lies in the weakness of the eurozone economy and inflation falling to 1.8%.
Expectations of such a central bank move are pushing EURUSD quotes down, but Christine Lagarde’s tone at the press conference may not be ‘dovish’ at all. It may be a compromise between ‘hawks’ and ‘doves’ and could lead to closing shorts in the euro, following the principle of “sell the rumor, buy the fact.”
Weekly trading plan for EURUSD
Meanwhile, the eurozone has to confront the problem of returning deflation, which was more difficult to combat in the past than high prices. This could lead to a reduction in the ECB rate to 2% by 2025. The EURUSD‘s trend remains downward, and the best strategy of the week will be selling the euro on the rise to $1.085.
Price chart of EURUSD in real time mode
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.