The Fed managed to calm down the market, convincing investors of the temporary nature of high inflation in the US and a slow pace of the monetary normalization. Under these circumstances, any doubts immediately affect the EURUSD. Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
Everything turned upside down in the financial markets. In March, the growth in the Treasury yield resulted in the US dollar strengthening. In June, everything is exactly the opposite. US bond yields are falling, the greenback is growing. It looks like buying the rumor and selling the news. In early spring, expectations of inflation acceleration led to Treasuries sell-offs. As soon as consumer prices soared to 5%, investors began to exit Treasury shorts, which allowed 10-year bonds to show the best weekly performance in a year.
Dynamics of Treasury yields
Source: Financial Times
The US bond market does look a little too calm. Since 1985, with the current core inflation rate of 3.8%, the yield on 10-year Treasuries has never dropped below 6%, and now it hovers around 1.5%. Consumer prices, excluding food and energy prices, have jumped by 8.2% Y-o-Y over the past three months. Consumer inflation expectations for the coming year have hit a record high of 4%, according to New York Fed research, and rates on debt liabilities are still low. Is it a paradox? No, it isn’t! It’s just market confidence in the Fed. The dovish stance of the Fed’s officials seems to be an announcement that it is time to fasten the safety belts, a smooth landing begins. It calms the financial markets. Isn’t it a reason for the new all-time highs hit by the US stock indexes?
The Fed has convinced investors of the temporary nature of high inflation and slow monetary normalization. Until recently, the markets expected that tapering of the $120-billion quantitative easing program would begin only at the start of 2022. Only rumors that this process, like the process of raising the federal funds rate, could go faster lured investors back to the US dollar.
About 40% of 51 Bloomberg experts expect the Federal Reserve to make its first step towards reducing asset purchases pace in August; 24% of respondents predict that this will happen in September. Rumors that the tapering of the QE may begin earlier than previously expected, and already at the meeting on June 15-16, the central bank should signal an interest rate hike, not in 2024, but in 2023, have sent the EURUSD to the bottom of figure 21. In March, 4 FOMC officials expected the interest rate hike in 2022, 7 – in 2023, the rest – in 2024. More than half of economists surveyed by Bloomberg believe that the median forecast for the rate hike will shift to 2023 this summer. The reason is higher inflation estimates and a better outlook for US employment and GDP.
Experts’ expectations for the Fed’s rate hike forecasts
Weekly EURUSD trading plan
The Fed, which is willing to avoid the repetition of the taper tantrum of 2013, has been acting correctly so far. However, it will have to take active steps already in June. The economic data challenge the Fed’s willingness to maintain the ultra-easy monetary policy for a long time until there are actual reports, not only forecasts. I do not expect the Fed to act aggressively and prefer to buy the EURUSD when the price is above 1.213 or rebounds up from the support at 1.2045.
Price chart of EURUSD in real time mode
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