The previous drivers of the EURUSD decline have ceased to exist. The Fed is slowing down, global risk appetite is growing, and the eurozone recession may not be as dire as expected. What will all this mean for the main currency pair? Let’s discuss the topic and make up a trading plan.
Weekly US dollar fundamental forecast
The maturity phase is characteristic not only of economic and monetary but also of life cycles. People become calmer, and their reaction becomes less violent. With the Fed’s monetary tightening slowing down, news that a few weeks ago would have led to a serious USD strengthening is now perceived as insignificant. More shocks are needed for the USD index rally, not pleasant surprises from the economic calendar. The EURUSD downtrend has entered the stage of maturity, which means there will be a reversal soon.
The 12% decline of the euro against the US dollar since the beginning of the year has several reasons. Firstly, the higher rate of the Fed’s monetary restriction compared to the ECB. Secondly, the flight of investors to safe-haven assets due to the deteriorating global risk appetite. Thirdly, the proximity of a recession in the eurozone against the background of the energy crisis. These drivers are starting to falter to the disappointment of EURUSD bears.
Unlike Jerome Powell, who announced a slowdown in monetary restriction, investors heard only hints from Christine Lagarde. European inflation is higher than the US one and continues to grow. So the ECB needs to raise the rate by 75 bps more than the Fed. Moreover, the head of the Bank of France, Francois Villeroy de Galhau, noted that the monetary tightening would continue until core inflation reaches a peak and begins to decline steadily.
European gas prices continue to fall against the backdrop of warm weather, declining demand and 99% capacity utilization in Germany. Morgan Stanley estimates that the volume of European gas storage facilities by the end of winter will be 19% higher than previously expected. Such gas market conditions contribute to faster growth of German industrial production and the first improvement in the sentiment of European investors in three months. Most importantly, it reduces the risks of a recession. At least the decline will not be as severe as expected.
Risk appetite has been growing lately. According to the majority of investors surveyed by MLIV Pulse, a Republican victory in the US midterm elections will lead to lower yields on Treasury bonds and the USD weakening. This party advocates fiscal consolidation, which usually results in lower inflation and increased demand for debt. At the same time, under conditions of a divided Congress and the White House, the risks of a radical change in fiscal policy are reduced.
Weekly EURUSD trading plan
Thus, the former advantages of the US dollar are no longer so effective. This creates the prerequisites for the EURUSD medium-term consolidation in the range of 0.98-1.01, followed by a downtrend reversal. The situation may change after the release of US inflation data, but for now, it is reasonable to stay out of the market for some time.
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