The growing number of Fed’s hawks shook the markets. However, investors are calming down and trying to clarify the position of the US central bank. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
The Fed’s members were unanimous during the recession, which helped to save the economy. However, the US growth is recovering, and investors should be prepared for a split among the US central bankers. FOMC members have different opinions on the prospects for achieving inflation and unemployment goals. There are many hawks in the Committee, and the Fed will try to discourage them. If so, the EURUSD bulls will be able to go ahead.
The first to attack the FOMC hawks was New York Fed President John Williams, who announced that the federal funds rate would be raised when the US reaches full employment and inflation slightly exceeded the 2% target on a sustainable basis. Despite the economic recovery, its progress is not yet enough to start tapering the QE. Everything is extremely clear and understandable. Conversely, the comments of St. Louis Fed President James Bullard are vague and ambiguous. He says that the rate might be raised at the end of 2022. Dallas Fed President Robert Kaplan is worried about the housing market and that the easy money policies would increase surpluses and imbalances.
The US economy is progressing. According to the Fed’s forecasts, the GDP could reach 7% in 2021, so the growing number of hawks in the FOMC is natural. The market was simply not prepared for the number of hawks to increase so quickly. If they continue to multiply, tightening monetary policy is inevitable. Another matter is whether they will be allowed to start monetary normalization. Talks about potential monetary tightening pushed up two-year and five-year yields, flattening the US Treasury yield curve. Remember, the yield curve inversion in 2019 was a clear signal of recession while the Fed’s officials ignored the signals referring to the US economy’s strength. Next, the pandemic started.
Dynamics of Treasury yield and USD
Dynamics of yield curves
Source: Wall Street Journal.
Following John Williams’ speech, the US stock indexes recovered after a sell-off the day before resulted from Bullard’s announcement about a rate hike in 2022. The EURUSD went up above the bottom of figure 19. Investors are looking forward to Jerome Powell’s testimony before Congress. In testimony prepared for delivery to Congress, Powell said that employment will be rising in the next few months while the inflation pressure should weaken.
Weekly EURUSD trading plan
Forex is gradually stabilizing after the shock resulted from the change in the FOMC rate forecast. I do not think the Fed will allow the hawks to go ahead; the US central bank is likely to proceed towards monetary normalization very slowly. Therefore, it will be relevant to buy the EURUSD when the price breaks out the resistance at 1.1925.
The euro could be supported by the release of Germany’s and euro-area PMIs. However, traders could bet on the USD longs ahead of the publication of the Personal Expenditure Index. This week, I expect increased volatility, so enter trades with narrow targets.
Price chart of EURUSD in real time mode
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