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The release of US PPI data has become a rehearsal for EURUSD. The pair refused to update the December highs, preparing for the CPI. Let's discuss this topic and make up a trading plan.
Contents
Weekly US Dollar fundamental forecast
Throughout 2022, the markets opposed the Fed. Investors often gave wishful thinking, and the central bank severely punished them for it. At the end of the year, nothing changed. CME derivatives are still expecting a dovish reversal from the Fed in 2023, and Jerome Powell and his colleagues can prove this is not the case if they want to. The release of US inflation data, and the meetings of the Fed and the ECB will clarify the situation.
In the long term, the pair's future looks bright even though Fed has raised the cost of borrowing by 375 bps since the beginning of the cycle and the ECB only by 200 bps; this dynamic has already been priced in EURUSD. The futures market predicts that by the end of 2023, the deposit rate will rise by 125 bps and the federal funds rate by only 60 bps. The latter will rise to 5%, but it will begin to decline under the influence of the recession. This is the Fed's dovish reversal that US stock indexes dream of.
Who is right, investors or the Fed? Time will show. In the meantime, the release of US inflation data and FOMC forecasts may once again punish the markets or, on the contrary, signal the beginning of a Christmas rally.
In 2022, on the day of the CPI data release, the S&P 500, on average, advanced by 3% in any direction, which is the highest mark since 2009. At the same time, the stock index fell in seven out of 11 cases. However, the Fed's hope for a soft landing looks doubtful. All because during the last 12 cycles of monetary tightening, the US economy has fallen into recession nine times. And there has not been such an aggressive monetary restriction for a long time!
Dynamics of S&P 500 after US CPI data
Source: Bloomberg.
The release of US PPI data served as a rehearsal for the upcoming storm. Despite its slowdown in November to 7.4% YoY and 0.3% MoM, the actual data did not match the forecasts of Bloomberg experts. This brought down stock indexes and put an end to the euro's ambitious idea to update the December high. If the same thing happens with consumer prices, the reaction will be much more violent.
Updated FOMC forecasts can be the next blow to EURUSD. If the Committee shows that it does not expect a reduction in the federal funds rate in 2023, the US dollar will begin to recover. However, if investors doubt this, the euro rally will continue. Deutsche Bank notes that the ECB cannot afford to cut rates next year. They are already at too low a level. This, along with the dovish Fed reversal, allows the bank to predict the growth of the euro to $1.15 by the end of 2023.
Weekly EURUSD trading plan
Now EURUSD intends to set back after moving forward. Hold short trades entered below 1.058 so that the pair retains a tendency to consolidate before the release of US inflation data.
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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