Dollar sees no end. Forecast as of 21.09.2022

75 or 100 basis points? Where is the federal funds rate ceiling? These questions make investors worry. The answers are soon to come. Where will the EURUSD go? Let us discuss the forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

Christine Lagarde’s words that the ECB expects further rate hikes over the next few meetings do not impress markets. Investors are worried by the Fed’s intention to act unilaterally by aggressively tightening monetary policy, regardless of inflationary surprises. The Us central bank may raise the federal funds rate by 100 basis points and meet market expectations for its growth to 4.4% in 2023. Naturally, the EURUSD bulls are set back.

The base case is a 75-basis-point increase in borrowing costs. A whole percentage point would be possible if the Fed saw signs of a further acceleration of inflation, which is not possible according to a single August report. So, I don’t think the central bank will make a big move right away.

However, the FOMC officials do not know where the inflation peak is. The Fed has to continue the most aggressive monetary tightening cycle in decades. Previous forecasts look outdated. They are designed for a soft landing. At Jackson Hole, Jerome Powell said the payoff for fighting inflation could be a recession.

That is why investors will be focused on the US unemployment report. According to Deutsche Bank, the median unemployment gauge could rise from 4.1% to 4.5% by the end of 2024. It still assumes a soft landing but with higher downside risks.

Dynamics of Fed forecasts for unemployment

    

Source: Bloomberg

As for the federal funds rate, the FOMC is likely to see it at 4% by the end of 2022 and even higher in 2023. This is higher than the 3.4% and 3.8% in the Committee’s previous forecasts. According to Bank of America, the matter is not so much how high borrowing costs climb but how long they stay at the top.

The euro is under pressure because of insufficient liquidity in the gas market and a lack of high-grade bonds for collateral. In contrast to the United States, where the entire Treasury market is associated with increased reliability, in Europe, it is customary to use only German securities and securities of some countries of the North as safe-haven assets. Because of QE, investors have little choice. Demand for German bonds is skyrocketing, while Italian bonds are being dumped, widening spreads and signalling high political risk.

European companies, fearing rising gas prices, hedged their risks by selling derivatives. They need to maintain a margin at the level of 10%-15% of the open position; otherwise, a margin call comes. By diverting money from other operations, they slow down the euro-area economy.

Monthly EURUSD trading plan

The 75-basis-point federal funds rate hike has been priced in the dollar pairs, and traders are to sell the dollar on facts, supporting the euro strengthening. However, the upward correction will hardly last long. Therefore, I suggest selling the EURUSD until at least it consolidates at parity.

     

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.

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