The ongoing strengthening of the greenback through tightening financial conditions and rising debt service costs creates headwinds for the global economy. The Fed doesn’t care about global problems. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Monthly US dollar fundamental forecast
The EURUSD bulls brought the price above parity amid a drop in gas prices to €185 per megawatt-hour, 45% below the record high at the end of August, and Joachim Nagel’s call for monetary tightening in October. The President of the Deutsche Bundesbank claims that a further increase in rates has already been agreed in the Governing Council. The EURUSD correction up was also supported because the bears were exiting shorts ahead of the FOMC meeting.
On the eve of the Fed’s September meeting, the three main trades are bets on a further inversion of the yield curve, falling stock indices, and a strong US dollar. 70% of respondents to MLIV Pulse, cited by Bloomberg, believe that in a month, 10-year Treasury yields, which opens the door for the USD index to continue to rally. 61% of more than 700 large investors believe the greenback has not yet reached its potential. Bank of America argues that the US dollar will weaken only when inflation goes on a clear downward trajectory.
According to a study by the Financial Times, the world’s 20 largest central banks have raised borrowing costs by 860 basis points since the beginning of the year. Derivatives predict that during the rest of 2022, the pace of monetary restrictions will increase. The derivatives market expects the ECB deposit rate to rise above 2% and the federal funds rate to 4.5%. The Fed is acting more aggressively than the European Central bank, so the EURUSD is likely to continue falling.
Dynamics of expected central banks’ rates
Source: Financial Times
According to the latest FOMC forecasts, borrowing costs in the US will rise to 3.4% by the end of 2022 and to 3.8% by the end of 2023. Nearly 70% of 44 economists surveyed by the Financial Times believe that the ceiling for the federal funds rate will be a range of 4% -5%. 20% of respondents believe that the Fed will need to raise the rates higher.
Forecasts for the Fed’s rate ceiling
Source: Financial Times
As the US core inflation doesn’t slow down, it is clear that the updated FOMC estimates for the federal funds rate will be higher than previous ones. The question is how much. I think it is more important for the markets than the actual increase in borrowing costs in September, which will most likely be 75 basis points.
The Fed’s forecasts are the highlight of the upcoming meeting. How high will the rate go, and how long will it stay at the peak? The answers to these questions will determine the US dollar trend. Now, the greenback looks like the strongest forex currency because the Fed doesn’t care what happens to other economies. According to the Institute of International Finance, in 2023, emerging markets will have to pay off $83 billion of debt denominated in US currency. This means that they will have to cut budget spending, which will negatively affect the economies.
Monthly EURUSD trading plan
Why should the Fed care about global economic problems? It is focused on inflation and will spare no effort to take it under control. I recommend selling the EURUSD down to 0.97 on the corrections.
Price chart of EURUSD in real time mode
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