The Fed’s unwillingness to make any adjustments to monetary policy due to the temporary nature of the surge in inflation in the US encourages the EURUSD bulls to go ahead. Let us discuss the Forex outlook and make up a trading plan.
Monthly euro fundamental forecast
Trust but verify. If markets believe in the Fed’s words about the short-term nature of excessively high inflation, stock indexes rise, while Treasury yields and the US dollar fall, as a temporary surge in consumer prices should not induce the central bank to withdraw monetary stimulus. And vice versa, investors’ doubts result in the tests of the Fed’s determination in the form of sell-offs of stocks and bonds, which allows the greenback to strengthen. At the end of May, financial markets want to trust Jerome Powell and his colleagues.
The EURUSD bulls draw the price back above figure 22 base amid dovish comments of FOMC officials. Governor Lael Brainard, Atlanta Fed President Raphael Bostic, and St. Louis’s James Bullard said they would not surprised to see the inflation spike in coming months as the pandemic recedes, but much of those PCE gains should prove to be temporary.
Such a trend of US inflation, coupled with research by the Federal Reserve Bank of New York, according to which the Federal Reserve balance may grow from the current $7.9 trillion to $9 trillion in 2023, encourage EURUSD bulls to go ahead. Even if the Fed finishes QE, its assets will continue to grow through reinvestment of funds received at bond redemption. The central bank is not going to leave the bond market, which presses down the Treasury yields, contributing to the fall in the USD index.
I should note that the euro has its own growth drivers. For example, the euro-area securities become more popular. Since the beginning of the year, EuroStoxx 50 has grown by 13%, surpassing the result of the S&P 500, which has not happened since 2017. In 2017, the euro was 14% up versus the US dollar.
Dynamics of stock indexes
Source: Bloomberg
The primary drivers of the European stock indexes rally this year are a large number of undervalued European companies, whose revenues will grow in response to the victory over the pandemic; fewer fears about inflation surge in the euro area than in the United States; maintaining of the ECB’s ultra-easy monetary policy; accelerated vaccination; positive forecasts for the euro and, finally, expectations that the euro-area GDP will exceed the forecasts. The growing appeal of the euro-area assets results in the capital inflow to the European financial market, which supports the EURUSD bulls.
Monthly EURUSD trading plan
Of course, the Forex situation could change at any moment. However, as long as investors believe the Fed and the euro has its growth drivers, the EURUSD uptrend is likely to continue. If the price breaks through May’s highs, the euro should continue the rally towards $1.23 and $1.24, so one could add up to the longs entered earlier.
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 LiteForex. 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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