USD is going down. Forecast as of 05.04.2023

An increase in the number of signs that the US economy is approaching recession strengthens the EURUSD. The first drop in vacancies below 10 million in two years triggered the pair’s growth. Let’s discuss this topic and make up a trading plan.

Monthly US dollar fundamental forecast

The US economy is deteriorating more and more due to the Fed’s aggressive monetary tightening. Following the real estate market and the banking system, the situation in the labor market is getting worse. The number of vacancies dropped below 10 million for the first time in two years. Employers’ demand for employees is falling. This happened even before SVB’s bankruptcy, so the market situation will continue to worsen, forcing investors to focus more on the approaching recession. It lowers the US dollar and brings EURUSD closer to 1.1. 

In February, the number of vacancies in the US decreased from 10.6 million to 9.9 million, which is significantly lower than the 10.4 million predicted by Bloomberg experts. Before the pandemic, the indicator was at around 7 million. The ratio of vacancies to unemployed fell from 1.9 to 1.67 (the lowest level since November 2021). In February 2020, the indicator was near the level of 1.2. 

The labor market is starting to cool down. Therefore, if the March employment report disappoints investors, derivatives will believe in the end of the Fed’s monetary tightening cycle, which will force the US dollar to decline. Judging by the dynamics of the securities market assets, the fall in the treasuries yield affects the USD more than the decline in stock indices. Against the background of continuing high inflation, the US yield curve inverts even more, which signals an approaching recession. 

This is the nature of the economic cycle. The Fed, fighting high inflation, raises the borrowing cost which with a time lag affects the US economy. Something breaks in it, and a recession comes. The current period is marked by the highest prices and the most aggressive monetary restriction in four decades. Will the recession turn out to be extremely serious?

The US is actively moving in this direction. Disappointing employment data forced the futures market to increase the chances of keeping the federal funds rate at 5% in May from 42% to 60%. If the indicator remains at this level, the Fed’s monetary policy tightening cycle will be completed, which will strengthen EURUSD.

Citigroup believes that the ECB will continue to focus on core inflation in the eurozone (which has reached a record high of 5.7%) and will bring the deposit rate to 4%. +100 bps to the current level will narrow the yield differential of American and German bonds and help EURUSD bulls.

Monthly EURUSD trading plan

Bets on divergences in monetary policy and economic growth worked out. Hold and add up on correction to the EURUSD long trades entered above 1.0715, which we increased on the breakout of the local high at 1.0925. Focus on 1.12 and 1.14 as targets.

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