An agreement between Republicans and Democrats on a debt ceiling calmed the financial markets. However, there were no changes in EURUSD quotes. Why? Let’s discuss this topic and make up a trading plan.
Monthly US dollar fundamental forecast
In theory, the debt ceiling deal eliminates default risks and gives the Fed a free hand. After strong PCE data, the chances of a federal funds rate hike rose to 63% in June, strengthening the USD. However, government spending cuts would be another blow to an already-cooling US economy, increasing recession risks and weakening the greenback. Therefore, EURUSD quotes remained unchanged.
The agreement between the Republicans and Democrats provides for preserving non-military budget spending for the 2024 fiscal year at the same level as in 2023. In 2025, its growth will be limited to 1%. If 12 appropriation bills are not passed, spending must be cut by 1%. Over the past few quarters, their growth made it possible to smooth out the effects of a cooling economy. Otherwise, the possibility of a US recession will increase. According to Bloomberg, it will hit with a 65% probability over the next 12 months.
There is another unpleasant news for the greenback. According to JP Morgan, after raising the debt ceiling, the Treasury will issue $1.1 trillion worth of debt over the next seven months. This is a relatively large amount for such a short period. These securities will have high rates, increasing the risks of capital outflow from bank deposits. This will make the topic of the banking crisis relevant again and slow down the economy even more.
The Fed must weigh all the risks to decide whether to continue the monetary tightening cycle despite the acceleration of the PCE index from 4.2% to 4.4% YoY in April and to 0.4% MoM. An increase in the growth rate of consumer spending from +0.1% MoM in February-March to +0.8% in April raises the possibility of raising the federal funds rate to 5.5%. This is another proof of the US economy’s stability.
Thus EURUSD bears gain a new advantage. According to Barclays, the active introduction of AI by US companies will contribute to the inflow of capital into the stock market and the USD strengthening. The indicator developed by the bank indicates the growth of the AI/USD correlation.
Monthly EURUSD trading plan
Thus, expectations of a further increase in the federal funds rate and capital inflows into the US stock market will support the greenback. On the other hand, fears of a banking crisis and recession will weaken the USD. Most likely, the EURUSD medium-term consolidation scenario becomes the base one. But what will be its boundaries? If the pair does not fall below the May low in the coming days, then the range will be 1.07-1.095. Otherwise, it will be 1.065-1.09. Thus it would be reasonable to buy the euro on the decline against the US dollar and sell it on the rise.
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