Euro faces penalty. Forecast as of 20.09.2022

The FOMC upcoming meeting is a bearish driver for the EURUSD, but the pair is rising. The euro bulls are playing against the Fed and will be penalized. Let us discuss the forex outlook and make up a EURUSD trading plan.

Weekly euro fundamental forecast

Investors make the old mistake. Ahead of the FOMC September meeting, the US stock indexes have been up. The S&P 500 bulls do not worry about a possibility of a 100-basis-point rate hike by the Fed. The stocks rally supported the euro, and an increase in the risk appetite is not the only reason for the EURUSD correction up.

At Jackson Hole, Jerome Powell made it clear that the Fed would accept a recession as the price for fighting inflation. Fears that the central bank will go too far pressed down stock indices and supported the growth of the US dollar. Logically, a lower likelihood of a hike in the federal funds rate by a full percentage point in September from 38% to 19% discouraged the EURUSD bears. Nevertheless, the greenback’s positions against a basket of major currencies look strong, while the successful start of the euro at the beginning of the week results from internal factors.

When Russia completely blocked the Nord Stream, some analysts suggested that gas prices affect the EURUSD stronger than monetary policy. The gas price sank by 45% from August highs, strengthening the euro.

Dynamics of gas prices in Europe


Source: Bloomberg

The EU provides fiscal stimulus worth €150 billion, gas storages in Europe are filled by 86%, the LNG flows from the US and the Middle East are increased, and the energy demand in Europe has somehow declined. Therefore, the gas futures are down. In theory, the risk of a recession in the euro area has decreased, encouraging the ECB to take active steps. The Vice-President of the European Central Bank, Luis de Guindos, claims that a slowdown in the GDP growth will not reduce the rate of inflation growth, drastic measures are needed. Probably, Frankfurt, following the example of Washington, is not averse to sacrificing the economy to defeat record-high prices.

The problem is that as the heating season approaches, the demand for gas will increase. A cold winter will put Europe in an extremely uncomfortable position. The gas price in 2022 is seven times higher than the average for this time of year, which fuels inflation and puts the economy on the brink of recession. Bloomberg experts have increased the likelihood of an economic downturn over the next twelve months from 60% to 80%. The sooner the recession comes, the sooner the ECB will stop monetary tightening. The specialists do not expect the deposit rate to rise above 2%.

Forecast for ECB rate


Source: Bloomberg

Weekly EURUSD trading plan

Thus, the EURUSD current growth is just a correction in the downtrend. The FOMC meeting should be a bearish factor for the euro, so the EURUSD rally is not natural. The buyers are likely to fail in a game against the Fed. If the euro doesn’t break out the resistances at $1.005, $1.007 and $1.0012, it will be relevant to sell.


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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