The market was running ahead of the Fed for a long time, predicting the federal funds rate cut in September. Now its opinion has changed, and FOMC officials agree with this. How will this affect EURUSD? Let’s discuss this topic and make up a trading plan.
Monthly US dollar fundamental forecast
When the Fed raises the federal funds rate above long-term Treasury yields, the market feels that the central bank officials have tightened monetary policy too much. This allows pessimists to say that a recession is inevitable. Indeed, a number of macroeconomic indicators point to a recession, but if you take a closer look at the situation, it does not look like a recession. The hope that the US GDP reduction will be avoided inspires EURUSD bears to strengthen.
Dynamics of the Federal funds rate and Treasury yields
Source: Bloomberg.
If the Fed rate is higher than the yield of 10-year Treasuries, perhaps the former is not so high, but the latter is too low. US Treasuries are a safe-haven asset. Investors buy it because of fears about an upcoming banking crisis or default. As a result, the return on the price falls. In May, it grows as fears recede. President Joe Biden is confident that an agreement on the national debt ceiling will be concluded. Western Alliance’s statement of the influx of deposits contributed to the growth of the US KBW Nasdaq index by 7.1% (the best performance since 2021).
However, the market does not intend to completely abandon the idea of an upcoming recession. 22 out of 27 Bloomberg experts predict a US recession within the next 12 months. However, the timing is constantly shifting. This circumstance gives hope for a soft landing. Especially as the labor market remains strong and inflation is slowing down without a sharp fall in unemployment.
US recession forecasts
Source: Bloomberg.
Thus, the market believed too much in the recession and the Fed’s dovish reversal, so it is now correcting its forecasts. Current estimates include a 24% chance of a federal funds rate hike in June and a 48% chance of a cut in September. New York Fed President John Williams believes that it takes time for the monetary restriction to hit the economy.
For the first time in a while, it looks like derivatives agreed with FOMC officials’ opinion about holding the borrowing cost unchanged. This helps the EURUSD to find balance. The range of 1.08-1.085 may become a border around which the pair will consolidate before new growth or fall drivers appear.
Monthly EURUSD trading plan
The trade corridor will be wider. Expect consolidation in the range of 1.075-1.09. However, its more precise borders will be known later. In the meantime, EURUSD bears should start looking for entry points for long trades when the pair is declining. However, EURUSD sales on growth also remain relevant.
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.
