The fourth quarter was extremely unsuccessful for the USD index. But what could you expect if the S&P 500 is ready to mark the longest winning streak since 2004? What will happen in 2024? Let’s discuss this topic and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
Forex was the first to recover. While the S&P 500 took another small step toward an all-time high, EURUSD‘s failure to hold above 1.11 triggered a selloff. There are too many contradictions in the market. The Fed will cut the federal funds rate by the 150 bps expected by derivatives only in the event of a recession, and no one is predicting that. The US economy is strong, but inflation is plummeting. The eurozone is very unstable, and the euro is growing rapidly.
The dollar is the currency of pessimists. At the start of 2023, investors feared a recession and doubted that the Fed would curb high inflation. However, at the end of the year, consumer prices are rapidly slowing down, and markets are confident of a soft landing. The Federal Reserve made a dovish reversal, which became a reason for optimism and caused the USD index to close the last 12 months in the red (which has not happened since 2020). The fourth quarter was especially bad for the greenback. According to its results, the USD lost 4.6%.
The best G10 currencies are the Swiss franc and the British pound, while the main outsiders are the Japanese yen and the Norwegian krone. It is interesting that CHF and JPY may change places in the new year. The Swiss National Bank officials are abandoning the strong franc policy, which has kept down import prices, and may begin buying foreign currency. The Bank of Japan is on the verge of normalizing monetary policy, while its colleagues intend to weaken it.
What will happen in 2024? The fall of the greenback is welcome news for most of the global economy. This reduces the cost of servicing and repaying dollar-denominated debts and stimulates international trade. At the same time, the profits of American companies from foreign operations are rising. The global economy is recovering and global risk appetite is growing. There are many reasons for optimism and, therefore, good news for EURUSD. The external background creates a favorable environment for the euro and allows it to grow even when the eurozone is weak.
Thus, the medium- and long-term prospects for the main currency pair look bullish, but a downward correction may occur in the near future. It is driven by investors’ awareness of the fact that the market has been running ahead of itself for a long time. Indeed, the S&P 500 is on the verge of a nine-week growth, which would be its best performance since 2004. The rally is based on tensions between the soft landing and the derivatives industry’s expected cut in the federal funds rate from 5.5% to 4% in 2024.
Weekly EURUSD trading plan
EURUSD correction is inevitable. It will not break the uptrend, but the bulls need to take a break. It is quite possible that the rollback has already started. If so, then use the euro’s fall below $1.1055 to add up to short trades entered in 1.1095.
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