USD doesn’t believe in dovish reversal. Forecast as of 12.05.2023

Who said the Fed has to cut rates five months after peaking? If we recall 1929, then the decline occurred after eight. In 1981 the rate was reduced after 29 months! Why sell the dollar? Let’s discuss this topic and make up a trading plan for EURUSD.

Weekly US dollar fundamental forecast

Don’t go against the Fed. The market again remembered this principle and began to buy the dollar. Despite new signs that the US economy is cooling, the debt ceiling issue, falling Treasury yields, and the possibility of a federal funds rate cut in 2023 following the release of new US macrostatistics. Central Bank officials said, they did. Holding borrowing costs on a plateau is perceived by investors as a form of monetary tightening, which weakens the EURUSD.

The slowdown in producer prices to 2.3% in April (the lowest since January 2021) and the rise in jobless claims to the highest level since October 2021 once again proved that the US economy is cooling. Moreover, PPI increased by 0.2% MoM, which coincides with the pre-pandemic dynamics of the index. Its slowdown gives hope that the pace of consumer price growth will also fall.
This circumstance led to a drop in the treasury yield and increased the possibility of a reduction in the federal funds rate in July to 50% and in September to 85%. It was just as high before the release of the US jobs report in April. Back then, employment made investors doubt a dovish reversal. These doubts still exist.

What are the market assumptions about rate cuts by the end of the year based on? Is it a yield curve inversion that almost always leads to a recession? Is it a fact that over the past six Fed tightening cycles, borrowing costs have started to fall an average of five months after peaking? But if you consider 14 cycles, the figure will increase to almost eight months.

If we compare it with the late 1970s and early 1980s, when inflation was as high as it is now, the gap will be 29 months! The federal funds rate may remain at 5.25% for more than two years. In this case, it is not reasonable to sell the US dollar.

The situation would be different if Fed’s rival central banks continued to stay hawkish. However, the latest ECB and Bank of England meetings convinced the end is near. If such a pro-monetary restrictionist like Joachim Nagel isn’t sure if the deposit rate will go up after the summer, what about the other members of the Governing Council?

Of course, the banking crisis in the US and the debt ceiling issue help EURUSD. However, according to Reuters experts, prior to a potential default, treasury yields are more likely to rise than fall, which will support the US dollar.

Weekly EURUSD trading plan

The market is ready to experience a EURUSD correction in the direction of 1.08. However, the increase in the borrowing limit and the market’s refusal of the dovish reversal can make the drawdown deeper. In any case, it is reasonable to hold short trades entered in 1.105 and boosted on a breakout of 1.097.

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