The EURUSD bears could only drive the price to a two-week low. Is their weakness temporary? What’s next? Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
The EURUSD is about to start consolidation, and the downtrend can only be restored in two cases. If the Fed decides to surprise the markets and announces in September that it will start tapering the QE already in November. Or if the US stock indexes go into a deep correction for another reason. For example, due to the inability of Democrats to implement a new fiscal stimulus package.
Remarkably, the two main bearish EURUSD drivers are based on the same factor. Inflation. Judging by the forecasts of Bloomberg experts, in August, consumer prices will slow down from 5.4% to 5.3% but will continue to be at excessively high levels. If they persist until the end of the year, the Fed will finally have to admit that nothing is more permanent than temporary. Furthermore, according to research by the Federal Reserve Bank of New York, an increase in annual inflation expectations, from 4.9% to 5.2% in August, only adds fuel to the fire.
It should be noted that the rise in inflation is a global trend. The CPI is also rising in other advanced economies, but not as quickly as in the United States. Most likely, the reason is the large-scale monetary and fiscal stimuli. Yes, there are supply problems that allow producers to raise prices, but in the USA, this process is faster, which can be attributed to strong domestic demand. Which, in turn, is tied to the support of the economy from the Fed and the White House.
Dynamics of inflation in advanced economies
If inflation remains at elevated levels, maintaining current and adding new stimulus could harm the economy. The Fed will be forced to quickly phase out the QE and raise interest rates, and Joe Biden’s $ 3.5 trillion project risks not getting through Congress. Yes, it is considered less inflationary than the previously adopted $1.9 trillion package, but it will drive prices up in any case. It should be noted that one of the drivers of the S&P 500 rally was the expectations of legislators’ approval of the new stimulus plan, and if this does not happen, the stock index will be corrected down. It is good news for safe-haven assets, including the US dollar.
The euro is supported by factors that are likely to be temporary. Faster GDP growth in the euro area compared to the United States in the second and third quarters risks slowing down in the fourth one. Bloomberg experts predict that inflation in the currency block will peak at 3.2% in October-December, and fall below the 2% target by mid-2022. A member of the ECB executive board, Isabel Schnabel, believes the excessively high inflation is unlikely to last for a long time.
Forecasts for euro-area inflation
Weekly EURUSD trading plan
Thus, until the September FOMC meeting, the EURUSD pair will be in the medium-term consolidation, and in the absence of surprises from the Fed, it will continue consolidation. In such a situation, the price growth above 1.182 will result in the correction towards 1.1850-1.186. If the price falls below 1.18, it will continue declining towards 1.1755 and 1.1715. Nonetheless, the downtrend will hardly resume now.
Price chart of EURUSD in real time mode
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