empty
 
 
You are about to leave
www.instaforex.eu >
a website operated by
INSTANT TRADING EU LTD
Open Account

27.02.202417:30 Forex Analysis & Reviews: EUR/USD dynamics depend on speed of Fed's monetary policy easing

This information is provided to retail and professional clients as part of marketing communication. It does not contain and should not be construed as containing investment advice or investment recommendation or an offer or solicitation to engage in any transaction or strategy in financial instruments. Past performance is not a guarantee or prediction of future performance. Instant Trading EU Ltd. makes no representation and assumes no liability as to the accuracy or completeness of the information provided, or any loss arising from any investment based on analysis, forecast or other information provided by an employee of the Company or otherwise. Full disclaimer is available here.

The conventional practice of the U.S. Federal Reserve involves a gradual ascent in interest rates, often likened to an escalator, when aiming to gently moderate economic activity. Conversely, when confronted with an economic recession demanding swift intervention, the Federal Reserve swiftly lowers rates, comparable to an elevator's rapid descent. However, the anticipated scenario in 2024-2025 suggests an unconventional approach, where the pace of interest rate adjustments is uncertain. Whether the borrowing costs ascend gradually or not, this unpredictability would be welcomed news for those bearish on EUR/USD.

Federal Funds Rate Dynamics

Exchange Rates 27.02.2024 analysis

The current cycle is unique, happening against the backdrop of an economy unwilling to slow down its GDP growth. Instead of a soft landing, investors are increasingly discussing a new economic acceleration. This is facilitated by both a strong labor market and favorable financial conditions. However, these factors simultaneously pose the risk of accelerating consumer prices. The risks are quite high. It's not surprising that officials from the Federal Reserve are considering lowering rates only by the end of the year.

Furthermore, Federal Reserve Vice Chair Philip Jefferson drew parallels with the soft landing in the 1990s. Back then, the Federal Reserve reduced borrowing costs not once in two meetings, as the current futures market predicts. It eased monetary policy, paused three meetings, and then resumed the cycle of monetary expansion.

In any case, the more positive economic indicators the U.S. receives, the less likely the rate-cutting process will start in June. Nordea Markets forecasts that it will only happen in September. By that time, the European Central Bank (ECB) will already have eased its monetary policy in June. Whoever acts first will lose. Such timelines for the start of monetary expansion provide grounds to sell EUR/USD.

On the other hand, the euro may benefit from the strength of the U.S. economy. Along with it, the Eurozone is recovering, as is China. The regional currency is pro-cyclical, reacting positively to good news about global GDP. In this regard, the conclusion from the G20 finance ministers' meeting that the likelihood of a soft landing for the global economy is increasing is good news for EUR/USD bulls. The main risk is the rapid development of deflationary processes.

Global Inflation Dynamics

Exchange Rates 27.02.2024 analysis

Exchange Rates 27.02.2024 analysis

Thus, the euro no longer looks like an easy target as before, but the robust U.S. economy leaves no doubt about the strength of the dollar. It's not surprising that Danske Bank recommends selling EUR/USD on upward pullbacks. Ideally, these pullbacks should be driven by expectations of important macroeconomic data from the United States. In this regard, the euro rally ahead of the release of data on U.S. durable goods orders and inflation is an excellent opportunity to implement this strategy.

Technically, on the daily chart of EUR/USD, the pair failed to approach the upper boundary of the fair value range 1.0745–1.0875. The inability to do so will be a sign of weakness for the bulls and a reason to sell the euro towards $1.0815.

Marek Petkovich
Analytical expert of InstaForex
© 2007-2024

Open trading account

InstaForex analytical reviews will make you fully aware of market trends! Being an InstaForex client, you are provided with a large number of free services for efficient trading.




You are now leaving www.instaforex.eu, a website operated by INSTANT TRADING EU LTD
Can't speak right now?
Ask your question in the chat.

Turn "Do Not Track" off