Dollar cools down. Forecast as of 08.07.2022

Moderately positive US domestic data reassure investors of a soft landing of the economy. Will it weaken the US dollar? Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

The market has been so fixated on a recession lately that hardly anyone believed in a soft landing for the US economy. Only two scenarios were considered. The first suggests that inflation remains hot, the central bank is raising rates, and the US economy is facing a recession. The second one implies the prices are falling rapidly, damaging production, and the US economy is slipping into recession anyway. The latest moderately positive domestic data reassured investors of a soft landing, supporting the US stock indices and risk appetite. However, the EURUSD bulls did not go ahead.

Despite a slow down in the number of vacancies and services PMI, the indicators came out better than expected. The US trade deficit in May narrowed for the second time in a row to its lowest level in a year. And the increase in the number of applications for unemployment benefits to the highest level in six months indicates a cooling but not a collapse of the labor market.

Investors focus not on the deterioration of economic data but on the speed at which it occurs. In that regard, a modest decline in non-farm payroll growth to 270,000 and unemployment remaining at 3.6% in June supports the idea that Jerome Powell will ensure a soft landing. It should have weekend the US dollar as a safe-haven asset, but the US exclusivity supports the EURUSD bears.

According to ING, regardless of whether Russia cuts off the gas or not, the euro area will still plunge into recession. This will force the ECB to raise rates by only 100 basis points rather than by 140 basis points expected by the derivatives market.

The president of the Dutch central bank, Klaas Knot, has a different opinion. He notes that in an ideal world, the ECB would like to reduce inflation and, at the same time, stimulate the economy. Unfortunately, the central bank is forced to make a choice. And its mandate is very clear, and the Governing Council must focus on slowing down inflation.

Klaas Knot is considered to be an ECB hawk. He is certainly among some of the Governing Council officials who, judging by the minutes of its June meeting, called for leaving the issue of a 50-basis-point deposit rate hike in July open. In fact, the market is confident that the process of monetary tightening will start from 25 basis points. The European Central Bank prefers a consistent and cautious approach, which, against the backdrop of the Fed’s determination, supports the EURUSD bears.

Weekly EURUSD trading plan

I believe unless there is a significant slowdown in the US employment growth to 150,000 or lower, the major currency pair won’t rise, and it will not be relevant to exit the EURUSDshorts entered at level 1.0415. A near-to-forecast report will increase the chances of a soft landing for the US economy, support the idea of US exclusivity and provide a reason to sell the EURUSD towards parity.

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