What saved euro? Forecast as of 09.09.2022

The ECB’s rate hike by 75 basis points didn’t support the EURUSD. Uncertainty of Christine Lagarde turned the euro back below parity, but the main currency pair closed the day with a gain. What happened? Let us discuss the forex outlook and make up a EURUSD trading plan.

Weekly euro fundamental forecast

Christine Lagarde’s uncertainty and Jerome Powell’s decisiveness should have crashed the EURUSD. However, the markets went on to wishful thinking, expecting a slowdown in US inflation to reduce the chance of a 75-basis-point rate in September, weakening the US dollar. In summer, the stock indexes rally turned into a crash. How will the situation develop this time?

The ECB’s decision to go for the biggest rate hike in history, by 75 basis points, did not come as a surprise to investors, as they expected exactly such a move. The EURUSD bulls hoped for a hawkish surprise from Christine Lagarde. However, the ECB president didn’t look much confident. She doesn’t know how much borrowing costs could rise, saying that markets should not consider September’s sweeping moves the norm. The ECB officials expect more than two rate hikes but less than five.

Lagarde did not formulate the criteria under which the ECB would go to QT, and when comparing the ECB monetary policy with the Fed, she referred to the strong US economy and the overheated US labour market. In my opinion, the analogy with the United States is not appropriate in an environment where the European Central Bank is concerned about a weak euro. As a result, due to the uncertainty of the ECB president, the EURUSD pair sank to 0.993. However, US stock indices encourage the euro bulls.

The 39,000 level is a kind of red line for the S&P 500. In September, the bears failed to lower the stock index quotes below it despite a huge flow of negative resulted from the Fed’s hawkish stance, an increase in the likelihood of a 75-basis-point hike at the next FOMC meeting up to 86%, and good news from the US labour market; all these factors are now considered as bearish for the stock market.

Dynamics of S&P 500

Source: Bloomberg.

Jerome Powell said in his last speech that the Fed will act decisively and continue like this until it does its job; that is, he has done nothing to put the idea of a 50-basis-point increase in borrowing costs back to the market. However, the S&P 500 went higher. This is because investors are looking forward to the US inflation report for August. Consumer prices are expected to continue decelerating from 8.5% to 8.1%, which in theory should force the Fed to slow down its monetary tightening pace.

Weekly EURUSD trading plan

Markets are rising on expectations, and the EURUSD rally is natural. I have already stressed the likelihood of a correction, suggesting one should enter longs above 0.995 and add up to them on the breakout of the resistances at 1 and 1.002. As for a rebound from 1.007, it is too early to enter medium-term shorts ahead of the US inflation report. The euro can well go up to $1.012 and $1.018. The pivot level should be $1.003.

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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