The highest inflation in almost 40 years and the drop in unemployment to almost 4% should have forced the Fed to raise the rates. However, everything is not that simple. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
Investors’ reaction to the US jobs report means that the market is satisfied, and consumer price growth meets the expectations. The Fed should speed up monetary normalization. The S&P 500 hit a new all-time high, while both Treasury yields and the US dollar weakened somewhat. However, the EURUSD bears will hardly be discouraged.
The US CPI soared to 6.8% in November, the highest since 1982, and core inflation increased to 4.9%, the highest since 1991. So, why don’t the Fed cool the economy by raising the interest rates? Given that real rates are negative, the central bank’s passive attitude means it continues stimulating the economy. Goldman Sachs’s US financial conditions index declined in 2021 as if the Fed had cut its borrowing costs by 100 basis points.
Dynamics of US inflation
Source: Financial Times
If only it were that simple! In fact, the huge monetary stimulus inflated $1.3 trillion in corporate debt alone. The increase in the debt servicing cost will negatively affect US companies’ financial results, pressing down shares and stock indexes. The Fed wants to avoid panic in financial markets. The US central bank has been extremely cautious preparing investors for the QE tapering and then accelerating the taper. It is the right time the Fed indicated its willingness to raise the rates, but the process of hiking the rates should be slow and gradual.
Dynamics of US debt
Markets are growing on expectations. Currently, the US dollar is rising faster than any chance of the Fed’s monetary tightening. According to the Bank of America, investors have been the most optimistic about the greenback since 2015, as they are sure that the Fed’s hawkish tone will result in raising the rates. The same was six years ago when the Fed began a cycle of monetary restriction.
Most respondents polled by the Bank of America believe that the US QE will end in the first quarter, and the rate will be raised in the second. Next, the federal funds rate will be up at two more FOMC meetings by the end of 2022. Investors believe that the biggest risks for the markets are monetary policy tightening, high inflation, and a peak in liquidity.
Weekly EURUSD trading plan
Looking at the events of six years ago and taking into account that the EURUSD had been falling since the spring of 2014, 1.5 years before the Fed rate hike, the euro bears should be increasing seller pressure. However, the euro-dollar started consolidation four-six months before the first raising of the federal funds rate. Most likely, history will repeat itself. Therefore, if you sell the EURUSD on the breakout of the support at 1.1265, you should be extremely cautious, being prepared to close positions any time. The same is true for purchases entered on the breakout of the resistance at 1.1355.
Price chart of EURUSD in real time mode
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