The EURUSD downtrend looks so strong that nobody wants to buy, considering it dangerous. However, no trend can go on without a correction. Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
That is how markets work; after a wave of sell-offs, one should take the profit and exit sell trades. And it doesn’t matter what exactly discourages the EURUSD bears, either the possible appointment of Lael Brainard as the Fed’s Chair or almost a 100% chance that the Bank of England will raise the interest rate. The euro growth above $1.133 could result in an upward correction. The matter is how far the bulls will go.
It is not the economy and inflation that matters for the foreign exchange market but how central banks view it. At the end of March, US Treasury yields hit 1.75%, 15 basis points higher than now, although the inflation outlook seemed less daunting than it is now. In contrast to the outlook for GDP, which was expected to grow rapidly. However, EURUSD traded 450 pips higher as the Fed insisted it was not thinking about raising the federal funds rate and would not make adjustments to the quantitative easing program. Today, they are actively tapering the QE, and most FOMC members believe that they will have to tighten monetary policy in 2022.
The derivatives market is convinced of two federal funds rate hikes in 2022 and weighs the chances of the third one. The indicators signal that the Fed will raise the rates six times in 2022-2024. Morgan Stanley estimates that this will happen 9-10 times in the current tightening cycle. Citi is also confident about a faster monetary restriction compared to the opinion of investors.
Dynamics of market expectations and FOMC rate forecasts
An active increase in rates by the central bank is the best argument in favor of buying the currency it issues. In this case, it is the US dollar. However, the greenback could weaken in the short term due to the uncertainty about the new Fed Chair. Jerome Powell can be replaced by Lael Brainard, who is considered an advocate of a looser monetary policy relative to what is currently discounted. However, the change of the Fed Chair is not a reason to stop selling the EURUSD on the corrections up. Whoever takes over as head of the world’s most powerful central bank, they will depend on the uncertainty around inflation and growth prospects. The euro downtrend is strong and will continue, so bears could go ahead.
In the short run, the prospect of Lael Brainard coming to power has forced some EURUSD bears to take profits and exit shorts. Moreover, the rise in the UK inflation to 4.2%, the highest level since 2011, increased the chance of the BoE’s rate hike in December, strengthening the pound. The growth in the sterling price supported the euro, as it has been many times.
Weekly EURUSD trading plan
Therefore, the EURUSD bear trend remains strong. It will be relevant to sell on the price rise over the next 6-9 months. However, anything could happen in the short run. The pair could be corrected up if the price breaks out the resistance at 1.133. If the bulls fail, it will be relevant to sell the euro in the short term as well.
Price chart of EURUSD in real time mode
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