The dollar is fighting with itself. Forecast as of 09.08.2022

Despite a strong US employment report, financial markets continue operating in the “bad news is good news” mode. The EURUSD is supported as a risk appetite remains high. Let’s discuss it and make a trading plan.

Weekly fundamental forecast for dollar

When an adversary is tangible, fighting with them is easy, however strong they may be. Fighting with inner demons is much harder. The US dollar is not fighting with the euro, the pound, or other currencies — it is fighting with itself. Its inner demons — US stock and bonds — imagined the Fed had to slow down monetary policy tightening and then turn it back. A strong US employment report for July did not dissuade them, stabilizing the EURUSD near 1.02. Could inflation help the pair decide on its future direction?

Reigning over financial markets not long ago, Fear is now replaced by Greed. The markets want to grow, and investors are afraid to miss out. They already have already seen the S&P 500 rising rapidly after dropping to multi-year lows in March 2020. They remember how the stock index soared after hitting its bottom in 2007 following 57% selling. According to Investors Intelligence’s survey, the bulls/bears ratio was 0.56 then and 0.6 in June 2022. After dropping from January’s highs, the S&P 500 rose by 13%. Everyone wants to buy cheap, believing the US stocks’ downtrend is broken.

The buyer is helped by strong corporate reports, but the Fed will have to lower the federal funds rate amid a negative economic situation. It already did that in 2008, following a rise in 2004-2007, and in 2019, following an increase in 2015-2018. The market believes bad economic news is good news for stocks. Weak stats on the housing market, business activity, and consumer confidence are grains for that mill.

A slowdown in inflation expectations plays a particular part in this scenario. The latest research by the Federal Reserve Bank of New York shows the annual indicator fell from 6.8% to 6.2%, the 3-year indicator – from 3.6% to 3.2%, and the 5-year indicator – from 2.8% to 2.3%. The Fed seems to be doing a great job, so why not have a pause?

Markets hear what they want to hear. US inflation expectations influenced them more than FOMC’s hawkish speeches. Everyone hastened to buy the S&P 500, and this inner demon got in the way of the US dollar. Haste makes waste, right? 

It’s important to keep a level head in any situation. JP Morgan upgraded its forecast for federal funds rate growth in September from 50 to 75 basis points following strong employment stats. Evercore says there may be a 100-point rate hike. LH Meyer expects borrowing costs will hit a 4.25% peak.

Weekly trading plan for EURUSD

The Fed will continue policy tightening, holding rates high. Sooner or later, the S&P 500 will fall, and the EURUSD will be on sale. If inflation values are close to forecasts, we can sell on growth. A further CPI boost will allow us to continue selling on breakouts of support at 1.015 and 1.012.

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