Dollar: path of least resistance. Forecast as of 06.02.2023

The US jobs report did more good for the US dollar than Jerome Powell’s speech. The markets can still resist the Fed, but not the fact that USD’s old advantages can start working again. Let’s discuss this topic and make up a trading plan for EURUSD.

Weekly US dollar fundamental forecast

The mighty dollar is back. A rise in employment by 517,000, a drop in unemployment to a 53-year low, and an increase in the average working week make the recession impossible. The US economy may accelerate again, and the stock indexes may perform better than their foreign counterparts. If so, then the risks of EURUSD correction are growing.

The return of the weakened US dollar to the game could be its swan song against the backdrop of exiting USD short trades. Over the past seven weeks, hedge funds have been adding up to USD short trades, so a bounce up from here serves as the path of least resistance. On the other hand, EURUSD‘s fall is based on fundamentals.

The USD’s four-month decline was associated with losing its main advantages. Now they can support it again. If the labor market is so strong that employment is booming, a number of job openings are skyrocketing, and unemployment benefits are declining, then the markets may once again come back to the topic of American exceptionalism. The combination of slower inflation and strong consumer sentiment is even better than the Goldilocks regime. Costs are down, and profits are up. The US stock market may once again outperform foreign counterparts, while capital repatriation is great news for EURUSD bears.

Strong employment data has raised the possibility of a 5.25% increase in the federal funds rate from 30% to over 61%. If inflation rises again amid a strong economy, the Fed is more likely to increase borrowing costs after the pause than cut them. The chances of a Fed’s dovish reversal are falling, so the US dollar is strengthening.

Finally, an increase in US-China tensions could bring back interest in the USD as a safe-haven currency.

Thus, all three advantages that allowed the USD index to reach a 20-year high in the autumn of 2022 are back. It’s American exceptionalism, a more aggressive Fed, and rising demand for safe havens. The question is, are they temporary or the last year’s trend returning?

Weekly EURUSD trading plan

+517 thousand looks abnormal. It is unlikely that it will continue to increase at the same pace. However, the idea of a return of high inflation in a strong economy deserves attention. It looks like the markets are too focused on the dovish reversal and have already believed in their victory over the Fed. Perhaps they will be able to fight the central bank, but they are unlikely to fight the factors. It is worth paying attention to the fact that the EURUSD‘s inability soon to return above 1.0825 and 1.086 increase the risks of a correction.

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