The US economy is still sustainable, while the chances of a recession outside the US and the demand for safe-haven assets are higher than ever. Under such conditions, it seems that the EURUSD rally is overspeeding. Let’s discuss the topic and make up a trading plan.
Weekly US dollar fundamental forecast
Has the US dollar hit its high? Will it get back in the game? These issues concern the financial markets. HSBC and Morgan Stanley officials believe that the USD index has broken the high and is now on the decline. On the contrary, Goldman Sachs and Wells Fargo expect a higher ceiling on the federal funds rate and that the dollar will return to its former glory. Not surprisingly, opinions are divided. A split is also expected within the Fed.
San Francisco Fed President Mary C. Daly considers the rate level of 4.75% optimal, then her colleague from St. Louis, James Bullard, expects the cost of borrowing to rise to 7%. Atlanta Fed President Rafael Bostic believes it would be reasonable to raise the borrowings by another 75-100 bps and then hold them at that level for a long time if the US economy develops in line with the forecast. Numerous opinions were expressed at the November FOMC meeting, as a result of which Jerome Powell signaled a slowdown in the rate of monetary restriction. In the last full week of autumn, investors will be interested in the contents of the minutes of the meeting.
Meanwhile, asset managers continue to sell the US dollar and have brought short trades to the highest level since July 2021. Hedge funds are getting rid of the USD for the fifth week in a row.
Such data reinforces the risks of EURUSD uptrend correction, even if the long-term bearish trend is broken. The chances of profit-taking after a strong rally are very high. Moreover, the Fed is not satisfied with easing financial conditions, while the return of inflation to the 2% target looks doubtful. The CPI is likely to hit 3-4%, suggesting a higher Fed Funds rate peak than the futures market currently predicts.
For most of the year, the US dollar has been strengthening due to strong demand for safe-haven assets caused by fears of an approaching recession and the Fed’s aggressive monetary tightening. Other central banks followed the US economy but did not keep up. It continues to be more sustainable. Households spent only 25% of excess savings, Goldman Sachs estimates. By the end of 2023, this figure will rise to 60%. Therefore, retail sales and the labor market are so strong against the backdrop of the reluctance of many to return to it.
As long as the US economy remains strong, the Fed can afford to raise the federal funds rate. The US regulator is slowing down this process as it would like to assess the cumulative effect of monetary restriction. If the previous USD advantages continue to work, it is too early to disregard them.
Weekly EURUSD trading plan
A retest of support at 1.033 was successful, and a bet on EURUSD correction after a long rally worked out. It would be profitable to hold short trades and closely monitor the breakout of levels 1.022, 1.015 where a price rebound is possible.