Dollar cools down. Forecast as of 29.07.2022

As US stocks jump 8% from their June lows and Treasury yields decline, the greenback is weakening. Where will the EURUSD go? Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

The Fed has given up direct leadership and switched to session-by-session decision-making, which means that the central bank does not know what will happen next. However, the situation is more or less clear to investors. Bad news from the US economy is a reason to buy stocks and sell the US dollar. Lower Treasury yields and a positive attitude weaken the greenback. In this regard, the return of EURUSD above 1.02 amid a weak US GDP report looks natural.

After sagging by 1.6% in the first quarter, the US economy contracted in the second, by 0.9%, which in the language of economists, journalists, and market analysts means a technical recession. In fact, the decision on whether the US economy is in a recession is taken by the National Bureau of Economic Research. The organization interprets the recession as a significant slowdown in activity that spreads throughout the economy and lasts for several months. In response to statistics on US gross domestic product, the NBER said it does not believe in the two-quarter GDP decline rule.

Broad activity does not match the downturn, but it is clear that the economy is cooling down. The recovery is over, but the slowdown in GDP is now a forced necessity: it normalizes the balance of supply and demand for goods and services and also reduces wage growth and inflation.

Indeed, as in January-March, the main driver of GDP contraction in April-June was a slowdown in the rate of reserves accumulation. This indicates that less production is required to meet demand. If we add to this a strong labour market, there can not be a recession. However, ING believes that an actual recession is a matter of time. When it comes, at the end of 2022 or the beginning of 2023, will depend on new data. Weaker US domestic data are a reason to sell the greenback.

This is the opinion of the market. Investors believe that a slowdown in the US economy will force the Fed to suspend monetary tightening. However, in reality, the central bank has two options. It may continue aggressively raising the federal funds rate to curb inflation, eventually leading to price stability. Or it could go along with the financial markets and slow down the pace of monetary tightening to protect the economy. The result will be full employment. The dual mandate causes a split among the Fed’s officials. Still, investors, for some reason, forgot that Jerome Powell and his colleagues had previously stated more than once that they were ready to sacrifice economic growth to defeat inflation. The FOMC policymakers may have also forgotten.

Weekly EURUSD trading plan

Anyway, the EURUSD bears seem to be discouraged, which makes it relevant to enter short-term longs on the breakout of the resistance level of 1.0235 and 1.0255. A reason to buy could be a report of an increase in euro-area inflation. However, the potential of the upward correction looks limited.

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