Successful vaccination and explosive GDP growth give the Fed reasons to consider the tapering of the QE. Nonetheless, the experience of the taper tantrum in 2013 suggests it will not be easy. Will Jerome Powell solve the task? Let us discuss the forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
In March, the US dollar grew amid the US exclusivity, and investors admired the vaccination speed and the US economic rebound. In April, everything has dramatically changed. The exclusivity fades as many countries are speeding up vaccination campaigns, and their economies are set to grow rapidly during the rest of the year. In addition to the WHO announcement that the number of coronavirus cases is increasing in all regions of the world except Europe, this circumstance allowed the EURUSD bulls to drive the price above the base of figure 21.
About 68% of the adult population received at least one dose of the coronavirus vaccine in the USA. Furthermore, the US services PMI hit an all-time high of 63.1 in April. However, investors will hardly be surprised with these data. Another matter is strong economic data in the euro area. The euro-area manufacturing PMI has hit its all-time high, and the services PMI has exceeded level 50 for the first time in eight months, indicating the economic expansion.
Dynamics of euro-area PMIs
According to Bloomberg experts, the euro-area GDP contracted by 0.8% Q-o-Q in the first quarter, which means the currency bloc should face a double-dip recession. Nonetheless, the downturn resulted from lockdowns is temporary, which is proven by the euro-area PMI data.
The euro-area positive PMI data, the increase in the vaccination speed, the seasonal pandemic decline in Europe are likely to affect the Governing Council’s decisions in the near future. According to Bloomberg’s source familiar with the matter, the ECB April meeting was relatively calm, but there should be a heated debate at the next meeting on June 10. Some ECB officials call for the PEPP reduction already in the third quarter.
The Fed, whose meeting along with the publication of the US and European GDP data will become the highlights of the current week, has a different task. The major experience the Fed has drawn from the 2013 taper tantrum is that there are limits to the central bank’s ability to calm financial markets amid a move towards tighter monetary policy. The main question that will be discussed at the next FOMC meetings is how to inform investors about turning off the money flow correctly. In my opinion, despite the success of the US economy, it will be pretty easy for Jerome Powell to reassure investors now, as the US fight against the pandemic has not finished yet.
If the Fed Chair does not scare financial markets, and his speech at the press conference does not result in the Treasury yields rally, speculators will be able to sell the US dollar further.
Dynamics of USD index and US dollar speculative positions
Weekly EURUSD trading plan
I believe the factors of the euro-area double-dip recession and the US GDP surge in the first quarter have already been priced in the EURUSD. Therefore, if the actual data will be close to the forecasts, one could buy the pair on the correction with the buy targets at 1.2155 and 1.218 suggested earlier.
Price chart of EURUSD in real time mode
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