Just as the Fed and other central banks’ monetary tightening strengthened the US dollar, monetary expansion will weaken it. Let’s discuss this topic and make up a trading plan for EURUSD.
Fundamental US dollar forecast for a year
Markets are rising on expectations. The USD strengthening in 2022-2023 was due not only to the Fed’s aggressive monetary tightening but also due to expectations that massive rate hikes by central banks would slow the global economy, worsen global risk appetite, and increase demand for greenback as a safe haven currency. Simply put, the monetary restriction of the ECB and the Bank of England further weakened their pro-cyclical currencies. At the end of autumn, the situation changed dramatically, which predetermined the EURUSD rally.
G10 central banks rate hikes
Source: Reuters.
If the rate hike cycle is over, it’s time to think about cutting them. This is what the markets are doing, expecting the Fed and ECB to reduce borrowing costs by approximately 100 bps in 2024. However, the reverse process is now happening as massive monetary incentives raise hopes of accelerating the global economy, improving global risk appetite, and strengthening pro-cyclical currencies (euro and pound).
However, markets are outpacing themselves. For them to move from tightening monetary policy to easing it, macrostatistics must worsen. But this is not happening. A 5.4% MoM decline in durable goods orders indicates a cooling in the US economy. However, a decrease in the number of applications for unemployment benefits to 209 thousand proves that the labor market remains strong.
Central banks believe that inflation has not yet been defeated. Indeed, short-term inflation expectations in the US jumped to a 7-month high in November. In addition, American households’ excess savings are declining but remain at elevated levels, and wage growth of 4% or more is fueling prices.
Dynamics of inflation expectations and consumer sentiment in the USA
Source: Bloomberg.
Finally, the rapid rally in stock indices and falling yields on Treasury bonds and the US dollar are weakening financial conditions and preventing Fed officials from fighting inflation. Not surprisingly, central banks are unhappy with market pricing based on a possible decline in borrowing costs in 2024. They insist on the need to keep rates unchanged for a long period of time. Central bank officials are ready to resume monetary restriction cycles if prices unexpectedly accelerate.
US inflation and GDP have passed their peaks. Their slowdown proves that the Fed has finished monetary tightening. Market pricing is moving in the right direction, albeit too quickly. If so, the US dollar’s best days are over. However, in the medium term, EURUSD consolidation risks are growing.
EURUSD trading plan for a year
Thus, if you are a long-term investor, use a “buy and hold” strategy. The euro may rise to $1.18-1.2 in 12 months. If you prefer swing trading, switch from short-term short trades to medium-term long trades.
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.
منبع: https://www.litefinance.org/blog/analysts-opinions/usd-to-lose-status-forecast-as-of-23112023/
