The US dollar reached its 5-year highs against the euro and 20-year highs against the Japanese yen. What drives it? Do its rivals have any chances? Let’s discuss it and make a trading plan for EURUSD.
Weekly fundamental forecast for dollar
To win, one does not have to be strong. Knowing the rival’s weak spots is enough. The US dollar has its own steel muscles and knows how to use its competitors’ problem spots: the Bank of Japan’s adherence to ultra-soft monetary policy and growing fears of stagflation in the eurozone. Consequently, the USD index is trading near its 2-year highs, while its growth by over 5% in April has been the best monthly result since May 2012.
Wall Street Journal’s insider says Germany is ready to gradually give up Russian oil supplies. So, the EU will be able to join the embargo. The European Union imports 3-3.5 miliion barrels a day from Russia, paying daily €400 million to Moscow. The uninterrupted flow of petrodollars allows financing the war engine in Ukraine, and it must be stopped. However, further growth of energy resource prices is pushing the German economy to a recession and the European one — to stagflation. These fears are the key factor in the EURUSD‘s dive.
German inflation grew to 7.8% in April, drawing an upsetting picture for the ECB. If it starts raising rates, like the Fed, the eurozone’s economic downturn will be unavoidable.
The US looks better than the eurozone. Don’t be afraid of the US GDP’s fall by 1.4% in Q1. Consumer spending remains strong, and the main reason for negative sentiment is a trade deficit when the imports exceed exports. However, that points to a solid domestic demand and indicates that the US will make up for all losses in the second quarter. If the market sentiment was different, stock indexes would not have grown in response to the weak US GDP stats. The S&P 500‘s rally did not help the euro, to the regret of the EURUSD bulls.
The greenback is a safe-haven asset supported by all kinds of fears. So, the EURUSD bears feel support as the number of new COVID cases is growing in Shanghai for the first time in the past six days. Also, there’s a parallel with the year 2015, when $1 trillion in capital left China amid the yuan’s collapse.
Back then, the Fed had to refuse to raise the federal funds rate. It won’t refuse to do that now. CME’s derivatives signal that borrowing costs may be increased by 150 basis points at the FOMC’s next three meetings, which favors the USD index’s rally. When the ECB and the Bank of Japan, the Fed’s two main competitors, stick to a soft monetary policy, differentials between the interest rates become an important element of the US dollar’s power.
Weekly trading plan for EURUSD
The European inflation growth in April might not change anything. The EURUSD pair is declining. As long as the quotes are below 1.061 – 1.065, short trades make sense.