As much as the market is focused on the Trump trade, the EURUSD movement depends on the different paces of Fed and ECB monetary policy. In 2024, the derivatives market expects Washington to make three rate cuts, while Frankfurt is projected to make less than three. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Highlights and key points
- Trump is not satisfied with a strong dollar.
- FOMC officials have not dissuaded the markets.
- The ECB’s slowness supports the euro.
- The EURUSD may soar to 1.1 or crash to 1.09, depending on the central bank’s signals.
Daily fundamental forecast for euro
The aversion to the US dollar was so strong that EURUSD bulls were not swayed by statements from FOMC officials that the time for monetary expansion has yet to come or by unexpectedly strong US industrial production data. The greenback could benefit from Donald Trump and his pro-inflationary policies, which, in theory, should force the Fed to keep interest rates on hold. However, the Republican’s rhetoric gives the US currency little reason for optimism.
Donald Trump believes that the US dollar’s strength and the yen and yuan’s weakness have put the United States in an unfavorable position facing China and Japan. Vice Presidential nominee James David Vance openly calls for a weaker US dollar. He says devaluation is a scary word, but what it really means is making exports cheaper. Investors are in no hurry to sell the EURUSD pair as they fear that the new President will pressure the Fed to cut rates while using currency intervention to weaken the US dollar.
Despite the rhetoric from FOMC officials, the market remains convinced of a September rate cut. It expects as many as three acts of monetary expansion in 2024 amid doubts that the ECB will make at least two, pushing EURUSD quotes higher. Indeed, after the US employment and inflation data, there has been a divergence in the monetary policies of the world’s two leading central banks, supporting the euro.
ECB and Fed rate cut market expectations
Source: Nordea Markets.
Inflation in the eurozone is closer to 2% than in the US, so why would not the ECB cut the deposit rate further? The problem is the strong labor market. Wages are rising too fast, and low productivity prevents companies from passing on costs to consumers. In the US, slow wage growth against a backdrop of high productivity allows companies to keep prices low while keeping profits high.
This means the currency bloc faces a higher risk of reigniting inflation than the US. The European Central Bank needs more time and data to decide whether to cut the deposit rate. Meanwhile, the futures market is pricing in only 1-2 acts of monetary expansion from it, not nearly three as from the Fed.
Eurozone inflation
Source: Bloomberg.
Daily trading plan for EURUSD
There is a high probability that Christine Lagarde and her colleagues will not only leave the borrowing cost at 3.75% at the July 18th meeting but will also not signal a cut in September. If that happens, the EURUSD pair may soar to 1.1. On the contrary, if the ECB hints at a resumption of the monetary expansion cycle, it will force traders to take profits, pushing the main currency pair back to 1.09.
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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