USD: back to roots. Forecast as of 26.04.2023

History shows that the dollar usually rises due to bad news releases and US stock indices’ fall. In 2023, these trends were often violated, but the market reminds of them occasionally. Let’s discuss this topic and make up a trading plan for EURUSD.

Weekly US dollar fundamental forecast

The approaching recession will not bring anything good for the greenback. However, the market remembers that it is reasonable to enter USD purchases when stocks fall. The USD index rally is a reaction to bad news, even if the bad news comes from the US. However, there is another version. It is quite possible that the EURUSD correction was caused by another wave of investor panic in the markets. In fact, everything is calm.

According to the Conference Board, the fall in consumer confidence to 101.3 in April (the lowest level since July 2022) and the collapse of First Republic stocks by almost 50% to an all-time low of $8.1 contributed to a strong drop in US stock indices. Investors immediately remembered the banking crisis and the recession. Treasury yields have declined, and the chances of a 25 bps federal funds rate hike in May have fallen from 91% to 77%. Earlier, the interest rate swap market was fully confident in such an increase at the FOMC meeting and predicted an increase in the borrowing cost in June. However, now the market estimates the risks of +25 bps in May as 4 to 5.

First Republic attracted resources from the Fed and other regulators at rates ranging from 3% to 4.9%, while the return on its loan portfolio for the same period was 3.73%. According to Reuters, the company is considering selling assets and creating a “bad bank” to avoid bankruptcy.

Things are heating up. The banking crisis again threatens the markets, and the recession is about to hit the US economy. All the more surprising is the calmness of the Fed and the Treasury, whose officials claim that the system is stable and the economy can bring pleasant surprises. Thus, the Fed and other central banks’ refusal to provide dollar liquidity daily and the transition to traditional weekly auctions looks surprising. This means officially lowering the threat level of global financial stability to relative normal.

Maybe the crisis exists only in the minds of investors? The answer to this question will be given by the release of data on US orders for durable goods, GDP, and PCE. Positive data will contribute to the development of EURUSD correction.

The medium-term and long-term outlook for the pair remains bullish. The Fed has reacted too aggressively to problems in the banking system and expanded its balance sheet too quickly. In this regard, a dovish reversal is possible due to the US economy’s downturn. If so, then the dollar will weaken sooner or later.

Weekly EURUSD trading plan

While EURUSD is trading below 1.1, focus on short-term sales, especially in the case of the release of positive US macro statistics. However, the pair’s decline is just a correction, so be prepared that it will end.

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