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The Fed has given license to ease financial conditions, which could ultimately end badly for it. However, while US stock indices are growing, even the euro is feeling confident. Let’s discuss this topic and make up a trading plan for EURUSD.
Weekly US dollar fundamental forecast
After forecasting three federal funds rate cuts in 2024, the Fed allowed investors to increase their estimates to six. The US central bank also granted a license to ease financial conditions, which could end very badly for it and ultimately return interest in the US dollar. However, for now, EURUSD feels confident.
Dynamics of market expectations for the Fed rate
Source: Nordea Markets.
Compared to October highs, Treasury yields fell 106 bps, the S&P 500 rose 15%, the USD index fell 4.3%, and credit spreads narrowed, seriously weakening financial conditions and strengthening the US economy. In addition, oil prices fell 19%, which is good news for American consumers. Thus, there is no need to worry about domestic demand. The Fed wants to achieve a soft landing, which may force GDP to grow again. In theory, this should accelerate inflation.
Throughout 2023, the Fed feared repeating the mistakes of its predecessors from the 1970s. Then, the premature victory over high prices caused a new peak in inflation and a double-dip recession. However, at the end of the year, central bank officials unexpectedly started talking about a dual mandate. According to San Francisco Fed President Mary Daly, the Fed should not only give Americans price stability but also not take away jobs. Because when unemployment rises, it tends to do so very quickly. Therefore, it is reasonable to focus on three Fed funds rate cuts in 2024.
The Fed’s dovish reversal allowed stock indexes to strengthen. The S&P 500 is ready to update its historical maximum and contribute to the euro growth. At the same time, the EURUSD rally leaves investors perplexed. They used to believe that without a strong economy there cannot be a strong currency, and the eurozone is barely standing on its feet.
The decline in the German business sentiment index from the IFO, which was unexpected for Bloomberg experts, once again proved the weakness of the eurozone’s economy. The dynamics of the indicator, together with recent PMI data, convince us that in the second half of 2023 the German economy is sinking into recession. The ECB has much more reason to cut rates than the Fed, which is bad news for EURUSD.
Dynamics of the German business sentiment
Source: Financial Times.
It seems that the Fed has infected the markets with its optimism. The Central Bank began to indulge the wishes of investors. This led to an increase in stock indices and a USD weakening. Even such an unstable currency as the euro feels confident against the greenback.
Weekly EURUSD trading plan
As a result, EURUSD returned to its original levels. Back in early December, I said that the pair’s dynamics would depend on US stock indices and predicted consolidation in the range of 1.08-1.1 with a possibility for purchases in the lower boundary and sales in the upper. Perhaps it’s time to use a proven strategy again.
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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