FOREX Fundamental Analysis on August 29, 2022.
Market participants were waiting for a hawkish rhetoric from Jerome Powell. And the head of FRS justified the hopes of dollar buyers, confirming the regulator's intentions to continue tightening of the monetary policy till the appearance of stable results.
On Friday the EUR/USD sell-off continued with renewed vigor. The ECB certainly does not like the collapse of the single currency, but the European Central Bank has no power to stop the Fed. The pair has fallen to a 20-year low and speculators have ramped up sales to a March 2020 high.
It took Jerome Powell less than 10 minutes for the surge in forex trading. In his speech, the Fed Chairman mentioned the word "inflation" 46 times and referred to the experience of Paul Volcker, who had to take the U.S. economy through two recessions to bring the CPI down to the necessary level.
The hopes of some analysts that the Fed would pause at the hawkish rate, limiting it to a 3.3% rate in 2022, have dissipated. As Cleveland Fed Chair Loretta Mester said, the Fed can't afford to give away wishful thinking on the assumption that inflation has peaked. The regulator will continue to do its job.
Investors now have no doubt that borrowing costs will rise to 3.75%-4.00% this year and remain at those heights for a long time. Certainly a rate hike will lead to higher unemployment, lower consumer spending, and a negative impact on the U.S. economy, which will bring U.S. stock indices back to the lows of June. But the U.S. dollar will receive strong support. If we add to that the European problems, the EUR/USD target of 0.95 looks quite affordable.
Investors do not hear the "hawkish" statements from ECB representatives as they understand that the European Central Bank will not be able to compete with the Fed in tightening of the monetary policy. The ECB's maneuver is very limited by the collapse of an economy that is already having a tough time. All is not well in the U.S. either. GDP lost 1.1% in two quarters, but gross national income rose 1.6%. It can be assumed that the country's economy is in a stagnation phase, but a slowdown in the growth rate cannot yet be called a recession.
EUR/USD forecasts are gradually working out and now we recommend to stick to "bearish" forex trading strategies. Targets are 0.985 and 0.970.