Although the EURUSD downtrend looks strong, many bearish drivers have already been priced in the exchange rates. In such an environment, sellers need a reason to exit shorts. What will be the reason? Let us discuss the Forex outlook and make up a trading plan.
Fundamental US dollar forecast today
The fear of missing out makes investors ignore the real situation in the market. Expectations of the US positive data push investors to buy the US dollar, while any positive news from Europe remains undervalued. What news can provide the minutes of the FOMC November meeting and the personal consumption expenditure price index lagging behind the CPI? Markets bet on the Fed’s hawkish stance and higher inflation rate than Bloomberg predicts. As a result, EURUSD has returned to the key support at 1.122 – 1.1225, and investors are anticipating the news from the Federal Reserve.
The attempts of the euro bulls to go ahead on the unexpectedly strong euro-area PMI data and hawkish tone of the ECB officials have failed. Yes, the composite purchasing managers’ index jumped from 54.2 to 55.8. However, according to IHS Markit, this does not negate the risks of a slowdown in the euro-area GDP in the fourth quarter. Delays in supplies, soaring prices, and fears of a resumption of the pandemic are cited as the main reasons. Capital Economics believes that PMI will resume its decline in the coming months.
Dynamics of euro-area PMI
Source: Financial Times
The EURUSD bulls were not encouraged by the hawkish comments of the ECB officials. Following the governor of the Bank of France, François Villeroy de Galhau, calling for withdrawing the PEPP and not scaling up the APP, the concerns about permanently high inflation risks were expressed by Isabel Schnabel from Germany, Klaas Knot from the Netherlands, and Luis de Guindos from Spain. The latter said that while the central bank has consistently emphasized the temporary nature of high prices, the underlying growth drivers are becoming more structural and permanent. Such speeches brought back expectations of the ECB rate hike in 2022 to the market, which theoretically should have supported the euro. However, investors are currently so excited about buying the US dollar that they see no alternatives.
Markets are more concerned about the signals of the US bond market, where the 5-year breakeven rate, the difference in the yield of Treasury bonds and inflation-protected bonds, has been declining for five consecutive days. This means investors are confident that Powell and his colleagues can curb the prices. The Fed is expected to tighten monetary policy.
Dynamics of breakeven rate
The minutes of the last meeting of the FOMC can give a clue on the future of the $ 120-billion program of quantitative easing. As a result of the meeting, the Fed decided to wind down QE by $ 15 billion per month with a possible adjustment of the plan depending on the incoming data. If nothing changes, the asset purchases will be complete by mid-2022. Since then, there has been a lot of positive news about inflation, retail sales, and the US labour market. The tone of the Fed officials is growing more and more hawkish, but this will hardly be reflected in the minutes.
EURUSD trading plan today
I believe that the minutes release could send the EURUSD down below 1.122. However, if the price goes back above the important level, one could enter short-term purchases.
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.