Dollar power tripled. Forecast as of 03.08.2023

2023.08.03 2023.08.03
Dollar power tripled. Forecast as of 03.08.2023logo

The EURUSD was up after the inflation report had been published. However, the price has crashed again. The three main reasons are the growth gap, increased demand for safe havens, and the growing attractiveness of the US Treasury bonds. Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

The dollar is rising because economic resilience outweighs financial uncertainty. That is the world media has written about. In fact, the strength of the US economy and the downgrading of the US credit rating by Fitch from AAA to AA+ encourage the EURUSD bears. Strong ADP private employment data and 10-year Treasury yields rising to their highest levels since November sent the greenback up to the levels it collapsed from after the US inflation data for June was released.

The US economy is still the strongest. While investors are betting on a soft landing for the US economy, the euro area is due to slide down into a recession. More and more analysts join the opinion that the increase in the ECB deposit rate to 3.75% has been a mistake. Inflation in the currency bloc was rising mainly due to the energy crisis and supply chain disruptions. These factors cannot be affected by the European Central Bank. Aggressive ECB monetary tightening will ruin the euro-area economy. According to JPMorgan Chase, the US economy is the best the world has ever seen.

Despite the increase in the federal funds rate by 525 basis points since the start of the cycle, the US labor market has been extremely strong. ADP’s private sector employment rose by 324,000 in July, exceeding Bloomberg’s consensus forecast of +189,000.

Dynamics of ADP private sector employment

Source: Bloomberg.

Unemployment has been hovering near a half-century bottom for several months in a row. This helps to explain the different reactions of the markets to the downgrade of the US credit rating. In 2011, the problem with the debt ceiling was not resolved, and the unemployment rate was 9%, but everything is different now. The political impasse was broken in June, and the job market is still strong.

It becomes clear why 12 years ago, the Treasury yield was falling amid the growing demand for safe-haven assets, and now it is growing steadily. The strong economy, the intention of the Treasury to auction $103 billion in long-term bonds for the week, which exceeds forecasts, and the downgrading of the US credit rating encourage the EURUSD bears. The yield spread between US and German bonds continues widening, encouraging investors to sell the euro.

Dynamics of US-Germany yield spread

Source: Financial Times.

Weekly EURUSD trading plan

Thus, the divergence in US-EU economic growth and rising US bond yields provide the US dollar with a comfortable edge. Moreover, the rally in Treasury yields presses down stock indices and increases the demand for safe-haven currencies. Unless the EURUSD goes up above 1.094 in the near future, it will continue falling towards 1.086 and 1.08. I suggest holding down shorts entered at 1,102 and adding up to them on corrections.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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