A global monetary policy restriction cycle turned out extremely painful for high-risk assets. They used to grow amid low bond market rates; now, it’s the opposite. Let’s discuss it and make a trading plan for EURUSD.
Weekly fundamental forecast for dollar
High demand for safe-haven assets and American exclusivity — what can be better for the US dollar? The USD index is about to close April with the best monthly result since 2015 amid US stock indexes’ fall and a slowdown of the European and Chinese economies provoked by the war in Ukraine and an outbreak of COVID-19. The EURUSD has dropped to its lowest since 2017 as investors fear an escalation of the geopolitical conflict after Russia refused to supply gas to Poland and Bulgaria due to their unwillingness to pay for gas in roubles.
The higher gas prices climb, the likelier the EU economy is to face a recession. Poland and Bulgaria are the “first swallows.” Other counties may be cut off Russian gas deliveries too. Inflation will rise, and economic growth will slow down. Stagflation will become obvious. How can the eurozone compete with the Americans in such circumstances? Orders for durable goods grew by 0.8% MoM in the US in March, so businesses are doing well and trying to increase machinery and equipment to boost profits. The indicator has been growing for 5 out of 6 months.
A strong economy means a strong currency. The US looks much better than its main competitors, while Xi Jinping directed that it should be outperformed at any cost in 2022. Beijing was offended that the US GDP was growing faster than the Chinese one in Q4, 2021, for the first time in 20 years. Still, an outbreak of COVID-19 may help the US repeat the success.
The divergence between economic growth rates is not the only reason for the greenback’s consolidation. Deutsche Bank notes that US rates will be higher than in the eurozone in 2022 and 2023, even if the Fed stops raising them in June. So, the US dollar is used as a safe-haven asset and as a carry trade currency. To defeat inflation, the Fed will have to bring borrowing costs to 5%-6%, which will result in a recession in 2023, Deutsche Bank predicts. According to Bloomberg’s consensus forecast, a probability of an economic downturn in the next 12 months grew from 20% to 27.5%.
The US stock indexes’ fall favors the EURUSD‘s collapse, too. The world’s economy is going through a global policy tightening cycle, so popping the stock bubble seems necessary. Economies were growing, and treasury yields were falling in the past 18 months, which created a favorable environment for high-risk assets. Now, it’s the opposite. Unsurprisingly, the S&P 500 is collapsing, drawing the euro to the bottom.
Weekly trading plan for EURUSD
The EURUSD managed to reach an old target of 1.065 amid the divergence between economic growth rates and monetary policies and as a global risk appetite worsens. A breakout of support at 1.061 may result in a further decline to 1.05. However, I’ll risk supposing that the pair will get steady at current levels ahead of important US GDP and European inflation stats.
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