The dollar went back to the past. Forecast as of 16.08.2022

History repeats itself. Both technical and fundamental analyses are based on that principle. The current market situation looks pretty similar to what was in August 2021. How can we use that to form trading strategies? Let’s find it out and make a trading plan for the EURUSD.

Weekly fundamental forecast for dollar

Back to the past. If you monitor financial markets, you must have noticed that we returned to the year-ago situation. Back then, US employment and stock indexes grew amid the Fed’s comments on the temporary nature of high inflation. The central bank makes different comments now, but investors looking at the consumer prices in July see that inflation is due to transitory and not structural factors. This conclusion continues pushing the S&P 500 up, but the EURUSD bulls can no longer exploit that. 

The return of bets on a temporary nature of high inflation looks funny. Inflationary expectations have returned to the levels of August 2021: the market believes prices will be growing 3.3% in 12 months. History has shown this theory is not correct. Back then, the CPI soared almost three times higher, inflation went out of the Fed’s control, and the central bank had to raise the federal funds rate aggressively.

What has changed since then? Financial conditions have been tightened significantly, which slows down the US economy. The latest US stats have shown builder sentiment has been dropping for eight months in a row, the worst dynamics since 2007. The National Association of Home Builders index has fallen below the critical level of 50 for the first time since May 2020. The NY Fed Manufacturing Index has shown the worst value since 2000.

The Fed’s fight with inflation slows down GDP. On the other hand, the market idea that the rate will reach a peak of 3.8% and have fallen to 3.2% by the end of 2023 looks crazy. If the Fed stops, the US economy will avoid a recession but face another round of high inflation. Then, it will be hard to avoid a deep downturn. Nouriel Roubini thinks that borrowing costs should be at 4.5-5% to make inflation decline to the target. I would not argue with that. Thus, I expect another portion of hawkish comments from the FOMC, particularly, Jerome Powell. The high-handed S&P 500 will then be brought down a peg. 

The EURUSD bulls will then get in more trouble. The pair is falling despite the US stock indexes’ rally. I think the reason is American exclusivity and the rising demand for protective assets. The European energy crisis is gathering pace: gas prices rose almost six times compared to last August. Chinese data are disappointing. So, the US looks like the only investment option. Non-residents buy stocks, bonds, and the USD like hot cakes.

Weekly trading plan for EURUSD

It’s important to keep patience in the market. The EURUSD‘s rally contradicted the idea that the Fed would not stop monetary restrictions, but things got back on track, eventually allowing us to open shorts successfully from 1.0355. We can reap the benefits and build them up, hoping the pair will return to parity.

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