Dollar has no choice. Forecast as of 02.06.2022

Most Reuters experts expect the recent USD drawdown to be short-term. Investors are lured back to the US dollar as the Fed is not likely to make a pause in monetary tightening. Where will the EURUSD go? Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

In late May, investors were discussing the risks of recession in the USA that should force the Fed to make a pause in monetary tightening. The Treasury yields were down as well as the US dollar. In early June, investors have changed their expectations from the Fed. The US Central Bank is to continue hiking the rates, and the Treasury yield is again rising, supporting the greenback.

Deutsche Bank notes that 8 out of 11 previous Fed tightening cycles ended in recessions. JP Morgan warns that the US economy will be shaken because of aggressive monetary tightening and the war in Ukraine that could push the oil price to $150 or even $175. Nonetheless, the latter bank suggests the Fed has no choice. The regulator must withdraw a part of the liquidity from the financial system to stop speculation and curb housing prices and the cost of other assets. Therefore, the supply of Treasuries should increase soon due to the monetary stimulus tapering. The price of US government bonds will decline, but their yields will continue growing.

The Treasury yields will also grow if the recession doesn’t occur. US strong domestic data reduce the chance of a downturn or a pause in the Fed’s monetary tightening cycle, encouraging investors to sell the bonds. Rising bond yield makes the stock overvalued, pressing down the S&P 500. Such a situation in the US securities market was featured in early May, and the greenback was the Forex leader at that time.

The suggested scenario is proven by the ISM report on the US manufacturing PMI. The indicator, unexpectedly for Bloomberg experts, rose from 55.4 to 56.1. Treasury yields picked up, stock indices resumed their decline, and EURUSD fell below 1.07.

According to most Reuters experts, the recent USD drawdown will be short-lived. 28 out of 44 experts predict that the correction will last less than three months, and 16 of them are sure that it will end in June.

Thus, the US dollar lures investors back. Most of the positive results from the expectations of the ECB monetary tightening has been priced in the EURUSD. Investors are likely to start selling off the euro-dollar, especially if the stock indexes are falling and Treasury yields are growing.

Weekly EURUSD trading plan

The euro bulls will be supported by the expectations of the ECB rate hike by half a point in July, but the bears also have some benefits. For example, St. Louis Federal Reserve Bank President James Bullard reiterated his view that the US central bank ought to raise interest rates to 3.5% this year. Therefore, I recommend holding the EURUSD shorts entered at levels 1.0735 and 1.07.

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