I don’t think the Fed will follow the example of the Reserve Bank of New Zealand, which canceled the cash rate hike due to the Delta. The US economy has adapted to COVID-19, is it worth changing the plans because of the pandemic? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
Monetary policy is not a one-man show. Even if Jerome Powell in Jackson Hole starts to panic about the Delta, which I highly doubt, it is not certain that the rest of the FOMC will be doves. Ahead of an important meeting of bankers, the Fed’s officials unanimously said that their business contacts claim that the new strain of COVID-19 has little impact on business. If so, is it worth giving up the Fed’s plans because of the pandemic?
According to the President of the Federal Reserve Bank of St. Louis James Bullard, at the moment the US economy does not need asset purchases from the central bank. The Fed is doing more harm than help by continuing to buy mortgage bonds, fueling the housing market bubble. The President of the Federal Reserve Bank of Kansas City Esther George noted that the economy is experiencing the current surge of COVID-19 as well as the previous ones, the pandemic has an insignificant impact on business. Furthermore, strong inflation and the labor market recovery suggest the QE should be scaled back. It is better if this process starts sooner than later.
Even Dallas Fed President Robert Kaplan, who dropped the US dollar by commenting on the Delta’s relation with monetary policy, seems to be hawkish. Kaplan says the federal funds rate could be raised next year.
The Fed’s hawkish tone encouraged the derivatives market to raise the chance of the first interest rate hike in December 2022 from 66% to 69%, in November – from 47% to 49%.
Probability of Fed’s rate hike in December 2022
Source: CME Group.
While the Fed is willing to start normalizing its monetary policy, there is a dispute among the ECB governors. Judging by the minutes of the July meeting of the Governing Council, the ECB officials are focused on the strategy of tolerance for inflation, which allows exceeding the 2% inflation target. The comment that the asset purchase will be completed shortly before the regulator hikes rates irritated the hawks. The ECB hawks suggest such wording implies a long-term process of implementing the asset purchase program, which would be harmful to the economy.
Therefore, the Fed is about to start tightening its monetary policy, while the ECB doesn’t even discuss such a possibility. Divergence in the monetary policies will continue setting back the EURUSD bulls. Furthermore, the US economy should be outperforming the euro-area one, which is evident from the willingness of Congress to approve of the new stimulus package for $4.5 trillion offered by Joe Biden.
Weekly EURUSD trading plan
Markets do not expect any surprises from Jerome Powell. The consensus forecast suggests the Fed Chair will announce the tapering of the QE in November and start the actual process in December or January. The Delta will hardly make the Fed cancel its plans. The Reserve Bank of New Zealand seems to be in trouble acting like a coward concerning the cash rate. I don’t think the Fed President, whose term expires in February, will make the same mistake. Therefore, it is still relevant to sell the EURUSD on the rebound from the resistance zone of 1.18-1.1815 or the breakout of the support at 1.1725.
Price chart of EURUSD in real time mode
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