The Federal Reserve shifted the timeframe for the expected interest rate hike from 2024 to 2023. The more aggressive signal from the Fed’s forecasts saw the dollar rise, stocks decline and yields on 10-year Treasuries jump. Banks are revising the EURUSD forecasts. What’s next?
Weekly US dollar fundamental forecast
Any meaningful move should be made at the right time. While professional investors wondered why the Treasury yield had dropped in the first half of June, the Fed seized the moment and signaled that it could raise the interest rate earlier than the market expected. The Fed sounded hawkish. The Treasuries’ response to the FOMC June meeting was the fourth-worst over the last eighty meetings since 2011, and yield rose at the highest pace in the last three months. Nonetheless, the Fed can be proud of choosing the right time. Financial conditions haven’t changed significantly.
Five worst reactions of Treasuries to FOMC meetings since 2011
The Fed’s officials can’t ignore the consumer price rise to 5% in May. The Fed still repeats its mantra about the temporary surge in inflation, and it is evident from the core PCE forecasts (3% in 2021 and 2.1% in 2022). However, an earlier timeframe for the federal funds rate hike seems to leave a way for a retreat. US economy can make progress, which has already happened, according to Jerome Powell.
The FOMC interest rate forecast must have been the major trigger for the Treasury yield rally and the dollar strengthening. The quarterly projections showed 13 of 18 officials favored at least one rate increase by the end of 2023, versus seven in March. The Fed could suggest at least two hikes by the end of that year, which delivered a serious shock to financial markets. It is one thing to raise the interest rate by 25 bps, which, based on the EURUSD drop last week, has been priced. It is another thing to hike the rate by 50 bps, which allowed the greenback to strengthen against a basket of major currencies.
FOMC projections for federal funds rate
Source: Financial Times
According to Jerome Powell, the forecasts signal that the US economy will recover sooner than FOMC officials expected, which is pleasant.
By and large, markets received the most hawkish signals now than in any other Fed’s message in a long time. The Fed seems to be backing away from its mantra that discussions about raising rates would be “highly premature.” As a result, the stock indexes dropped while Treasury yields along with the greenback rallied up. Under these circumstances, the world’s leading banks have revised their EURUSD forecasts. Deutsche Bank noted that the Fed does not support the euro buyers any longer. Goldman Sachs suggests broad U.S. dollar weakness, driven by its high valuation and a broadening global economic recovery. Therefore, the euro medium-term outlook is bullish. However, the EURUSD could be trading around 1.2 in the short term.
Weekly EURUSD trading plan
I believe the Fed’s hawkish turn increases the risk of the euro correction. If the bulls fail to consolidate the price at the support level of 1.198, the EURUSD could continue moving down to 1.1915. It is dangerous to buy the euro now. Therefore, it will make sense to enter euro purchases if the price closes above $1.2045 in the next few days.
Price chart of EURUSD in real time mode
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