Three reasons to buy the dollar. Forecast as of 16.09.2022

In periods before a recession, the US dollar tends to strengthen amid rising demand for safe-haven assets. But this is not the only advantage of the EURUSD bears. Let us discuss the forex outlook and make up a EURUSD trading plan.

Monthly euro fundamental forecast

The cure is sometimes worse than the disease. In an effort to cure the United States of high inflation, the Fed may go too far. The consequences will be felt outside the US, as part of the world economy will collapse. The global recession, in turn, will further slow down the US GDP. However, this is unlikely to happen before 2023. In periods before the recession, the greenback, as a rule, strengthens. Investors price the probability of a recession in the quotes of financial assets and are willing to buy the greenback as a safe haven.

According to the World Bank, if the expected monetary tightening fails to bring inflation to its target, central banks may raise rates higher than expected, which is fraught with a downturn in the global economy. In 2022, regulators are implementing monetary restrictions at a rate not seen in half a century. And in 2023, they will most likely continue to move quickly. Investors predict that the average global interest rate will rise to 4%, which is twice as high as in 2021. In this scenario, core inflation will anchor around 5%. Only an increase in borrowing costs to 6% will bring prices back within the target ranges.

The derivatives market suggests that the federal funds rate will rise to 4.4% by the end of the first quarter of 2023, will be held there for six months, and only then will the Fed follow with a dovish shift. Deutsche Bank even estimates the marginal lending rate at 4.9% and does not exclude its growth above 5% if the US labour market remains hot.

Dynamics of expected Fed rate

Source: Bloomberg

So far, the Fed has sent no signals of monetary easing. CME derivatives give a 74% chance of a 75-basis-point rate hike and a 26% chance of a 100-basis-point hike. As a result, the indicator will reach 3.25% or even 3.5%, a level that can be considered neutral in the current conditions. It does not stimulate, but it does not cool the economy either. Thus, until now, the Fed has been playing catch-up with inflation. So, the US dollar should continue strengthening.

Furthermore, stock indexes do not support the EURUSD anymore. Ahead of a recession, stocks usually rise amid negative economic news. And vice versa. Currently, the US domestic data look positive, pressing down the stocks. Employment and wages continue to rise faster than before the pandemic, jobless claims fell for the fifth week in a row, and a 0.3% M-o-M increase in retail sales in August suggests that consumers are not discouraged by high inflation.

Dynamics of retail sales

  

Source: Bloomberg.

Monthly EURUSD trading plan

So, the US economy still looks stronger than others, US exclusivity, high demand for safe havens amid an upcoming recession, and Fed’s aggressive monetary tightening mean the EURUSD downtrend will remain strong. The price could reach 0.97 and 0.95. The trading recommendation is 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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