USD performed well. Forecast as of 04.05.2023

The Fed signaled a pause in monetary restrictions while its chairman tried not to rule out a rate hike in the future. It turned out not very convincing, leading to the EURUSD growth to annual highs. Let's discuss this topic and make up a trading plan.

Weekly US dollar fundamental forecast

The Fed has set the bar very high for another federal funds rate hike, while everything Jerome Powell said is nothing more than a farce. The “game” rules were announced even before the May FOMC meeting. According to them, the central bank may signal a pause in the monetary restriction cycle, while its head will try to doubt it. Powell tried hard, but the markets didn't believe him. Treasury yields have fallen, and EURUSD is as close as possible to the annual high.

What matters is not what the Fed officials did but how they did it. The federal funds rate was raised for the tenth time in a row to 5.25% (the highest level since 2007). In addition, the phrase “some additional monetary tightening would be appropriate” disappeared from the text of the accompanying statement. Instead, a phrase about evaluating the many factors necessary for a new step appeared.

Although Jerome Powell claimed that the Fed would do more if warranted, the markets didn't believe him. Investors focused on the recession. The Fed chairman hopes the downturn will be slight, while the accompanying FOMC statement mentioned that tighter credit conditions would pressure the economy.

Not surprisingly, treasury yields and stock indices fell, pulling down the US dollar. The market still believes in a dovish reversal in 2023, and Jerome Powell did not convince it otherwise.

According to him, investors may have their own opinion on this matter. However, Powell and his colleagues don't think inflation will fall fast enough to abandon the idea of holding rates at a high for long enough.

Dynamics of the September Fed rate cut expectations

Deutsche Bank believes that the Fed is ready for a pause, and the ECB has work to do, so EURUSD will reach 1.15 (the highest since 2021) by the middle of the year.

Weekly EURUSD trading plan

Signals about a pause in the Fed's monetary restriction cycle practically exclude the option of raising the deposit rate by 50 bps at the May ECB meeting. The only surprise that Christine Lagarde and her colleagues can come up with is to speed up the balance sheet reduction process. Technically, they have a reason to do so, as core inflation continues to be near record highs. However, is it worth taking such a step in the face of a slowdown in bank lending in the eurozone？

The Fed put on an act well, but don't underestimate the central bank and the US economy. It is going good, according to ADP's employment data and ISM's PMI data. If the US jobs report for April is positive, investors will start buying the dollar again. Even though EURUSD may rise higher, exiting longs may start as early as May 4 if the ECB doesn't deliver surprises. Hold the long trades entered at 1.1055 for now, but be ready to reverse trades anytime.