Euro: weak but not collapsing. Forecast as of 09.06.2023

The EURUSD reaction to the recession in the Eurozone economy might seem strange. However, it is logical when the markets buy the rumor and sell the fact. The euro fell on expectations of bad news, and when they were released, it began to grow. Let’s discuss this topic and make up a trading plan.

Weekly Euro fundamental forecast

After the recession hit Germany, investors’ fears that it would also affect the eurozone contributed to the EURUSD decline. A technical recession has really happened. As a result, GDP declined by 0.1% for two consecutive quarters. The economy is weak but not collapsing. According to the Reuters consensus forecast, the economy will expand by 0.2% in each of the remaining quarters of 2023. At the same time, profit-taking on short trades allowed the euro to soar to a two-week high.

However, on closer examination, the situation is unfavorable for EURUSD. While US GDP is 5.4% higher than before the pandemic, its European counterpart is only 2.2%. The reasons lie both in the increase of the share of excess savings of the population (8.3% in the US compared to 5% in the eurozone), and in the greater willingness of Americans to spend money. Frightened by the war in Ukraine, Europeans have a greater tendency to accumulate capital.

At the same time, the export-oriented eurozone is suffering from weak external demand (including due to the slow recovery of China), and the ECB will not stop tightening its monetary policy. According to Bloomberg, the deposit rate will rise to 3.75% in June and July. Experts call inflation and war in Ukraine the most serious risks for the economy.

The surge in jobless claims to a 1.5-year high put pressure on the US dollar. This reduced both Treasury yields and the chances of a 25 bps federal funds rate hike in June to 25%. After the central banks of Australia and Canada raised the borrowing cost, the figure soared to 35%, and its subsequent decline triggered a EURUSD rally. The data on jobless claims could be affected by Memorial Day, which increased volatility.

So far, there is no good reason to buy EURUSD. Despite the Fed’s pause in raising rates in June, there is no particular divergence in monetary policy. It could expand if the ECB raised the borrowing cost to 4%. However, only 7 out of 42 Bloomberg experts predict this scenario. The stability of the US economy against the background of the stagnation of the European one strengthens EURUSD bears.

Weekly EURUSD trading plan

If US inflation continues to slow, new cracks appear in the banking system, and the labor market cools, everything will turn on its head. In this case, expect the recovery of the EURUSD uptrend. However, so far, the EURUSD rally potential is limited. In such a situation, it is reasonable to sell the pair when the price rebounds from resistance at 1.0805 and 1.084. The inability of the euro to stay above $1,076 is a reason to enter short trades.

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