USD: cursed but omnipotent. Forecast as of 30.05.2023
The tightening of the Fed’s monetary policy has an impact not only on the US but also on the eurozone. The stagnation of its economy is one of the drivers of the EURUSD decline. Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
Misunderstanding market processes gives rise to stupid theories. Analysts, surprised by the USD’s strength in response to the solution to the debt ceiling issue, argue that the greenback continues to use its safe-haven asset status. They claim that the bill has not yet passed through Congress. Republicans say they won’t vote for it because the budget cuts are insignificant. On the contrary, the Democrats believe that the changes are too big. In fact, EURUSD returned to the edge of the abyss near 1.07 for completely different reasons.
The Treasury’s account has shrunk to a 6-year low of $39 billion. However, even if it misses a payment in the current conditions, markets will see it as a technical error, not a systemic crisis. An agreement has already been reached. Debt ceiling disputes are no longer news, so it’s time to switch focus to something else, such as the consequences of restoring liquidity.
US Treasury cash balance dynamics
Investors expect $1.1 trillion worth of bonds and bills to be issued, which will divert money from the secondary market to the primary market and limit the potential for Treasury yields to decline. In the medium and long term, this may have a negative impact on bank deposits. However, it will support the US dollar in the short term. Moreover, US inflation remains at elevated levels, and the chances of the continuation of the Fed’s monetary restriction cycle in June are 60%.
Fed officials are once again cursed for what they are doing. If rates are not raised, inflation will harm the economy. If rates rise, a recession and crisis can begin. The central bank has no desire to conduct monetary policy through crises.
Moreover, according to the ECB study, changes in US borrowing costs are carried over to European bond markets. As the dollar strengthens, commodities denominated in this currency become more expensive, which worsens the foreign trade of the eurozone. The slowdown in the US economy is affecting its partners. As a result, the Fed’s rate hike has a strong impact not only on the US but also on Europe, while the ECB monetary policy change has minimal impact on the US economy.
Bond yield dynamics
Source: Financial Times.
The topics of recession in Germany and stagnation in the Eurozone have again become popular on Forex. This weakened EURUSD bulls hoping for an uptrend recovery. The risks of the pair returning to 1.04 look higher than the probability of updating the May high.
Weekly EURUSD trading plan
A weak US jobs report can change the situation. In this case, investors will stop hoping for a federal funds rate hike in June, and the major currency pair will be able to reach the bottom. In the meantime, EURUSD is confidently moving towards the target at 1.0665. I recommend holding short trades.
Price chart of EURUSD in real time mode
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