Unmasking the Future: A Detailed Forecast of the USD as of 29.11.2023

By Gustavo Nils Nov29,2023

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After six devastating blows from the Fed during the monetary restriction cycle, the markets are finally ready to fight back. The dovish reversal is coming! How can the EURUSD not grow? Let’s discuss this topic and make up a trading plan.

Weekly US dollar fundamental forecast

How can we expect a reduction in the federal funds rate if the US economy is robust and the labor market is as strong as before the pandemic? EURUSD bulls feared that FOMC officials would crush the euro with their hawkish comments. However, instead, they gave the market new impetus.

Chicago Fed President Austan Goolsbee compared monetary restrictions to cooking turkey. In both cases, there are risks of overdoing it. As inflation approaches the target, the need for additional roasting decreases. Otherwise, the turkey will be spoiled. This is a clear hint at the end of the monetary tightening cycle.

FOMC’s Christopher Waller, who is usually considered a hawk, announced a reduction in the federal funds rate if the disinflation process continues for several more months. He said that it makes no sense to keep borrowing costs so high if PCE is back to the 2% target.

The markets hit the jackpot because the growing expectations of the Fed’s monetary policy weakening due to slowing US inflation formed the basis for the rally in both stock indices and EURUSD. The possibility of a federal funds rate cut in May jumped from 51% to 70%, and the chances of it falling to 4.5% by the end of 2024 increased from 51% to 76%. Treasury yields collapsed, and so did the US dollar.

Dynamics of Treasury yields and the US dollar
At the same time, Christopher Waller rid the markets of fear. Previously, when investors went against the Fed, FOMC officials expressed dissatisfaction with weakening financial conditions. This made it difficult for the central bank to fight inflation. According to the speaker, there is no need to worry about softer financial conditions since Treasury yields are still higher than in July when the Federal Reserve stopped raising rates.

When hawks turn dovish, and markets confirm their ideas, it becomes difficult to resist them. In fact, the central bank can afford to loosen monetary policy since real rates will be too high in conditions of slowing inflation. If PCE falls below 3%, real borrowing costs of more than 2.5% would weigh heavily on the economy and likely push it into recession. The Fed will be forced to make a dovish reversal to prevent this from happening.

Weekly EURUSD trading plan
Now, EURUSD is looking forward to Jerome Powell’s speech at the end of the week. If the Fed Chairman confirms the change in the central bank’s outlook, the main currency pair’s rally will gain momentum. However, until this moment, EURUSD must withstand the release of data on US GDP and PCE. As long as the euro remains above $1,094, continue purchases.

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