FOREX Fundamental analysis for EUR/USD
That fear and greed have big eyes. When the Federal Reserve hinted at lowering federal funds rates in 2024 at three meetings of the Federal Open Market Committee (FOMC) at the end of 2023, the markets responded with six acts of monetary expansion. This led to a drop in Treasury bond yields and the US dollar. However, in the first quarter, investors curbed their appetites, which allowed financial instruments to recover. Derivatives predict a 75 basis point rate cut and with a 75% probability predict that the Fed will make the first move in June. The market agrees with the Central Bank, but economists do not, which creates conditions for the continued growth of the EURUSD pair.
Specific people are behind any decisions of large companies or financial institutions. Members of the Open Market Committee are more risk-averse than academic economists. 72% of 38 Financial Times respondents expect no more than two federal funds rate cuts in 2024. At the same time, the views of experts and the Fed on economic growth and unemployment coincide almost completely, but their opinions differ on inflation issues.
The Fed's decisions affect the economy conciliatedly 18 months after the release, so sitting and waiting for inflation to fall to the target level of 2% is not the best idea. Keeping rates high for a long time is a fast path to recession. Policy easing too early increases the risks of a new round of inflation. The Fed is willing to take more risks than economists, and the market supports the Central Bank. However, what happens if US economic indicators continue to improve and inflation reaches new peaks?
The Fed plans to cut rates by about 200 basis points so that the real rate remains around 0.5% with inflation around 2%. However, if the U.S. economy remains stable, most of the declines will occur in 2025-2026. What does this mean for the market? Treasury bond yields and the US dollar will continue to rise, as they did at the beginning of the year.
Is this process endless? No, of course not. If the US macroeconomic statistics start to deteriorate, things could change quickly. However, the power of the American economy can become a pillar for the rest of the world's economies. With the acceleration of global GDP, support for risky assets, including the euro, will increase. On the contrary, if Donald Trump returns to power by reviving the policy of protectionism, the economies of China and the EU will slow down, and investors will once again turn to the dollar as a protective instrument.
Time will tell which of these scenarios, optimistic or pessimistic, will come true. At the moment, the probability of two (or fewer) Fed rate cuts in 2024 is higher than a rate cut of 100 basis points or more. Therefore, the risks of the EURUSD pair falling to the level of 1.07 remain high. Our forex trading methods do not change. We hold and periodically increase short positions formed during the rebound from the 1.085 level.
EUR/USD Technical analysis
EUR/USD is in a short-term downward trend. At the moment, it's time to adjust. If the correction continues, we are waiting for testing of the resistance area 1.0894 - 1.0885. From here, we assume to look for sales with a target at the minimum of March 22. If the price breaks through and fixes below the extreme, then the Target area of 1.0729 - 1.0704 becomes the next target of the "bears".
The trend line shifted to 1.0940 - 1.0927.