2023.06.27 2023.06.27
Euro to face reality. Forecast as of 27.06.2023Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/
The global nature of high inflation and the strengthening of the US dollar in the global financial system make central banks act accordingly. In June, there is a desynchronization, but will it be of a long-term nature? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly Euro fundamental forecast
Investors are used to central banks acting together. They began monetary tightening together and so far have been moving quite synchronously. However, in June, there has been a divergence in the monetary policies of the world’s central banks. The US paused. Australia and Canada, by contrast, resumed the cycle after a break. The UK and Norway have accelerated monetary restrictions, and in the euro area and Switzerland, it is on track. Will the desync continue? And what impact will it have on dollar pairs, including the EURUSD?
In fact, the central banks didn’t use to act together in the past. In the 1990s, only 60% of central banks followed the same path, but in the 2000s, this figure rose to 80%. This is due to the global nature of inflation and the strengthening of the US dollar in the global financial system. Regulators are forced to use the same tools as the Fed. Of course, not all central banks act as the Fed. For example, the Bank of Japan sticks to its ultra-easy monetary policy, and the People’s Bank of China even cuts interest rates.
However, deviations in the trajectory of most central banks are likely to be temporary. Nonetheless, each central bank has a different rate ceiling, as well as the timing of its achievement. And there is also a probability of a dovish shift. According to the derivatives market, the Bank of England interest rate has the most significant reserve. It may rise to 6.25%, which is 125 basis points above the current level. Not surprisingly, the UK bond yields are rising faster than their US and European peers, and the pound has become the G10 top performer.
Dynamics of central banks’ interest rates
Source: Wall Street Journal.
However, in this case, we are talking about market expectations, which tend to be adjusted depending on the incoming data. And the weakness of the European economies will hardly allow the interest rates to go as high as it currently seems to investors. This also applies to the ECB deposit rate, which is expected to rise to 4%. The weak euro-area PMI report for June convinces that the European Central Bank will return from decisiveness to caution.
Another thing is that in the short term, the threat of accelerated core inflation in the euro area from 5.3% to 5.5% in June encourages investors to buy EURUSD on the expectations. Furthermore, the IMF is urging central banks to accept the uncomfortable truth about high price fixing and continue to tighten monetary policy, even if they have to face a severe financial collapse due to high levels of debt.
Dynamics of euro-area inflation and ECB interest rates
Source: Bloomberg.
Weekly EURUSD trading plan
The euro is rising on the news, and it might start falling on the facts. The EURUSD could plunge following the report on the euro-area inflation to the report on the German consumer prices. Therefore, I suggest selling the EURUSD if the price rebounds down from the resistance at 1.0965 or goes below the support at 1.092.
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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