FOREX fundamental analysis for EUR/USD on November 4, 2022
The Fed has clearly stated its intention to raise the rate, which the futures market expects to rise to 5.15%. What will other central banks do in this case? There are two options. Either drop out of the race and watch how others fight inflation, or continue to tighten monetary policy, at the risk of sending their own economy into recession
Christine Lagarde was the first to compete with the Fed, saying that the decline in the eurozone economy is unlikely to curb inflation. It looks like the ECB decided to go ahead with further rate hikes. However, the head of the ECB immediately explained that the deposit rate cannot keep up with the federal funds rate, as there is a large skew in the labor market. While in the United States the number of vacancies is almost twice as high as the number of unemployed, in the Eurozone the ratio is 0.3.
In the United States, only a drop in job growth to 100,000 a month could force employers to abandon wage increases as a measure of candidate attraction. This would at least help keep inflation from accelerating. At 200,000 jobs a month, we should hardly expect a pause in monetary retrenchment.
Of course, the U.S. economy may show recession, which together with the tight monetary policy of the Federal Reserve puts pressure on stock indices, and through the correlation of currencies, and risky assets. In such situation the demand for dollar will remain at a high level.
Financial institutions give different forecasts about the interest rate in the USA. The range varies from 5.0% to 5.75%, which supports the greenback. Currencies of countries with current account deficits - UK and New Zealand or real estate bubbles - Canada and Australia, will remain under pressure.
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The European currency stands apart. Here the energy crisis is the main driver of the systemic decline. Recession risks are increased by energy shortages, and it will take a long time to solve this issue. It means that the "bearish" trend of EUR/USD is for a long time, especially as the dollar periodically gets new positive triggers. In particular, the labor market report may be such today. Let's increase the shorts in the direction of 0.97 and 0.95.