US dollar: fear of inflation. Forecast as of 13.09.2023 | LiteFinance

The Fed’s monetary tightening went according to plan, but further decisions by the central bank still depend on inflation. How will EURUSD react to it? Let’s discuss this topic and make up a trading plan.

Daily US dollar fundamental forecast

The market is well prepared for the release of US inflation data. Neither EURUSD, S&P 500 nor Treasuries make sudden movements, understanding how significant the August data is. It is unlikely to change the Fed’s decision-making in September, but it could signal hawkish risks for the central bank’s future decisions.

Bloomberg experts predict an acceleration of consumer prices from 3.2% to 3.6% YoY and 0.6% MoM. On the contrary, core inflation should slow down from 4.7% to 4.3% YoY and maintain its previous dynamics of 0.2% MoM. Given the Federal Reserve’s emphasis on the latter indicator, it can be assumed that maintaining the rate at 5.5% in September is a resolved issue.

US inflation dynamics


Source: Wall Street Journal.

94 out of 97 Reuters experts are of the same opinion. 17 of 97, predict at least one more rate rise before the end of the year, including three who expect one this month. 28 of 87 respondents believe that the Fed will ease monetary policy in the first quarter of 2024, while 33 voted for the second.

The American Bankers Association holds similar views. According to its 14-member Advisory Board, including JP Morgan, Morgan Stanley and Wells Fargo, the monetary tightening cycle went according to plan. GDP growth will fall to less than 1% over the next three quarters, and inflation will slow to 2.2% by the end of 2024. The Fed will cut the federal funds rate by 100 bps to 4.5%. The forecast suggests the soft landing that markets are currently expecting.

Dynamics of US GDP and inflation


Source: Bloomberg.

However, 23 of 28 Reuters experts say the main risk is that the first cut in borrowing costs will come later than they expect. Indeed, inflation may move towards the 2% target much more slowly. If so, the Fed should keep investors on edge for a long time to come by arguing that monetary tightening is still possible.

A more serious slowdown in US core inflation in August than Bloomberg predicts could become a catalyst for the EURUSD rally. The increase in the growth rate of consumer prices is based on the increase in the cost of oil and gasoline. This is a factor that may eventually turn out to be disinflationary. As the labor market cools, Americans will cut back on spending to pay energy costs.

However, the eurozone, teetering on the brink of stagflation and recession, together with the cautious ECB, does not allow us to count on a serious EURUSD rise.

Weekly EURUSD trading plan

In such a situation, it is reasonable to add up to long trades entered at $1,072 amid stronger US core inflation data. Then, wait for further instructions from the European Central Bank. On the contrary, the stability of the core CPI may return investor interest in the greenback and EURUSD sales at the market rate.

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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