Euro goes against the wind. Forecast as of 01.09.2022

The stabilization of gas prices has changed the rules of the game for EURUSD. The acceleration of European inflation and the aggressive tightening of the ECB’s monetary policy are no longer seen as a path to recession. How will this affect the euro? Let us discuss the forex outlook and make up a trading plan.

Weekly euro fundamental forecast

The global environment is favourable for the US dollar. The US stock indexes featured the worst August in the past seven years. The Treasury yields are growing. The chance of the federal funds rate hike by 75 basis points has grown to 74% and the FOMC members sound hawkish. All these factors should have sent the EURUSD down. However, following a drop to parity, the euro rose to the resistance at $1.008, but the price didn’t break out the resistance.

At first glance, the euro grew amid the acceleration of the euro-area inflation to a new all-time high of 9.1% in August, the ECB’s hawkish comments, and the reaction of banks and the derivatives market.

Dynamics of euro-area inflation

Source: Financial Times.

The fact that prices in Europe are growing faster than in the USA couldn’t go unnoticed. The President of the Deutsche Bundesbank, Joachim Nagel, claims that the European Central Bank needs a strong rate hike in September and broad moves should be expected in the coming months. The derivatives market bets on a 75-basis-point rate hike at the next ECB meeting. Banks such as JP Morgan, Goldman Sachs, and Bank of America support this idea.

However, market expectations can’t change over a short time. Before Jackson Hole, investors were convinced that the ECB could not influence the energy prices underlying the record inflation acceleration, so tightening monetary policy would provoke or deepen a recession. The EURUSD was actively falling, which was facilitated by a rally in Treasury yields and the collapse of US stock indices.

These processes are still taking place, also because of Cleveland Fed President Loretta Mester, who argues the federal funds rate will reach 4% and remain there until the end of 2023. However, the US dollar is not supported as much as it used to.

In my opinion, the EURUSD stability results from the gas market and a lagging economic cycle in Europe compared to the USA. Following a rally, gas futures stabilize, suggesting a different point of view on the ECB monetary policy.

Dynamics of EURUSD and gas prices

    

Source: Trading Economics.

If inflation in the euro area is higher than in the United States and has not yet reached its peak, then the ECB may raise the rate by 75 basis points not only in September but also in October. The Fed, on the other hand, will slow down the pace of monetary tightening. If gas prices go down and the currency bloc manages to avoid a recession, German bond yields will rise faster than US ones, which will support the EURUSD correction up.

Weekly EURUSD trading plan

The expectations of the Nord Stream reopening and the upcoming ECB meeting could send the euro up. Unless the EURUSD fall below parity, one should buy.

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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