How long will dollar be strong? Forecast as of 04.07.2022

The best start of the US dollar since 2010 says nothing. In July-December, the situation can turn upside down. Will it? Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

Although the US economy faces a pending recession, it still looks stronger than other advanced economies, including the UK and the euro area. Furthermore, the Fed’s monetary restriction is the most aggressive, and the demand for safe havens is high. So, the US dollar has been the best performer in Forex in the first half of 2022. Amid the worst start of the US stocks and bonds since 1970, the US dollar has performed the best six-month rise since 2010. What will happen in the next six months?

The US is far from the armed conflict zone and almost independent of the Russian energy supplies. Therefore, the US economy is less vulnerable than the euro-area one. Furthermore, the currency block faces the risk of fragmentation. The ECB must solve the problems of the euro-area bond market and cover the yield spreads.

Successful vaccination and a smaller share of exports in the GDP favourably distinguish the US from China. If you compare the S&P 500’s 21% drop to the average 26% drop in the index during the last 11 declines, then there’s an 80% chance of a recession, but that’s not really a reason to give up on the greenback. Nomura predicts that the euro area, UK, South Korea, Australia, and Canada will face a downturn along with the US.

The expectations of global recession support the demand for safe havens, including the US dollar. Furthermore, the Fed’s willingness to hike the rates by 75 basis points several times before the end of 2022 encourages the EURUSD bears.

At the same time, 40% of investors polled by JP Morgan believe that the dollar index has already reached its peak near 105 and will end the year at current levels. 36% of respondents expect it to decrease. The main risk factors for the greenback are the slowdown in US inflation and the activities of the world’s leading central banks. The derivatives market was affected by the decline in the core PCE to 4.7% in May. The CME derivatives suggest the federal funds rate will be 3.2% by the end of the year. A week ago, this figure reached 3.5%.

The rise in the euro-area inflation to a record high of 8.6% forces the ECB to take active steps. Christine Lagarde’s mantra of raising the deposit rate by 25-basis-points in July already looks like a political mistake. The hawks require a bigger step.

Weekly EURUSD trading plan

On the other hand, Fabio Panetta, a member of the ECB Executive Board, has said that the ECB’s monetary restriction should be gradual since the acceleration of consumer prices in the eurozone, unlike the US, does not reflect excess demand in its economy. However, median PCEs from the Dallas and Cleveland Feds continue to rise, making the Fed take aggressive action. The situation is thin, so one should consider the possibility of both buying EURUSD on the breakout of resistance at 1.049 and selling the pair at 1.0365 with a target at 1.02 if the local low is broken through.

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