USD: too early to relax. Forecast as of 18.09.2023

2023.09.18 2023.09.18
USD: too early to relax. Forecast as of 18.09.2023

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

Federal Reserve officials were slow at the beginning of the monetary restriction cycle. Why should they relax quickly? Don’t expect it! Economists believe the rate will continue to rise. How will this affect EURUSD? Let’s discuss this topic and make up a trading plan.

Weekly US dollar fundamental forecast

Despite the positive US macroeconomic data, the futures market still forecasts a recession and several Fed monetary expansions in 2024. Goldman Sachs expects the tightening cycle to be over, but the Fed must leave room for maneuver. In contrast, economists believe the federal funds rate could rise above 6%. Who is right? The answer to this question will determine the EURUSD fate.

Previously, many criticized the Fed for its slow response. However, now, don’t expect central bank officials to relax quickly. Nearly half of the economists surveyed by the University of Chicago Booth School said the Fed would raise borrowing costs to 5.75%. Another 35% predict the rate will rise to 6%. 8% believe that it will rise above the 6%. Only a small minority believe that the monetary restriction cycle is ending. Academics are confident that high inflation will soon return due to a lack of oil supply.

Economists’ Fed rate forecasts

Source: Financial Times.

The opinion of economists fundamentally contradicts the derivatives market. Derivatives give a less than 40% chance of a further rise in the federal funds rate and forecast its decline to 4.75% and 4.5% by the end of 2024, with probabilities of 69% and 41%, respectively. Easing monetary policy by 75-100 bps implies a recession.

Goldman Sachs recently reduced the chances of a contraction in the US economy over the next 12 months. However, bank officials believe that the Fed has completed the cycle of monetary restriction. Borrowing costs peaked at 5.5%. However, the FOMC will maintain its version of raising the federal funds rate to 5.75% in its September forecasts. On paper, this should support the greenback.

In general, the scenario described by economists predicts EURUSD below parity, while the implementation of futures market forecasts will put an end to the pair’s decline. Its fate is in the hands of the Fed. ECB officials play a supporting role. Their actions are often disastrous for the euro, and a hawkish stance provides only short-term effects.

Euro and ECB rates dynamics

Source: Financial Times.

According to Financial Times insider, at least three members of the Governing Council are set to continue the monetary tightening cycle. This has allowed the EURUSD to bounce off its six-month bottom. One official said at the September meeting that he definitely did not agree that the ECB’s job was done. The second argued that after missing out in November, nothing prevents the rate from rising in December. The third did not rule out an increase in the deposit rate to 4.25% in 2023.

Weekly EURUSD trading plan

Alas, Frankfurt’s verbal interventions have little effect on EURUSD. Expectations that the FOMC consensus forecast for the rate could be reduced to 5.5% contribute to bulls strengthening. At the same time, a breakout of resistance at 1.0685 can become a reason for short-term purchases.

Price chart of EURUSD in real time mode