Slowing GDP growth, higher inflation in the US, and uncertainty surrounding trade policy make EURUSD bears frown, even against the backdrop of neutral Fed policy. Let's discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Moody's downgraded the US credit rating.
- Speculators continue to sell the greenback.
- Trade negotiations have stalled.
- Long trades can be considered if the EURUSD pair breaks through the 1.1225 mark.
Weekly US Dollar Fundamental Forecast
The avalanche is gaining momentum. The downgrade of the US credit rating is further evidence of the erosion of confidence in the US dollar. Scott Bessent has characterized Moody's assessment as a lagging indicator, asserting that the current administration could not have caused the observed economic downturn in 100 days and attributing the decline to the previous administration. However, the facts remain indisputable. Investors do not perceive the US as a secure investment destination, suggesting that the upward trend in the EURUSD pair is just beginning.
There is a growing consensus in the market that the US administration's unpredictable and unstable policies are making the US dollar less attractive. Despite Washington's denials, speculators continue to believe that Donald Trump wants a weaker greenback to support the US manufacturing sector. They continue to build up short trades on the USD index.
Speculative Positions on US Dollar
Source: Bloomberg.
According to Invesco, lower economic growth, higher inflation, and uncertainty in US politics are putting pressure on the US dollar, even against the backdrop of the Fed's neutral stance. As investors unwind their significant US asset holdings, the investment management company maintains its position that the USD index will continue to slump for an extended period.
Even central bank chiefs are openly expressing criticism of the US dollar. Christine Lagarde has observed that in periods of market volatility, the EURUSD pair typically experiences a decline. However, in this instance, the opposite has occurred. The euro has appreciated. The ECB president attributes this to a loss of confidence in the US dollar among some segments of the financial market. Investment management firm Neuberger Berman has found a more comprehensive solution, assuming that companies are increasing the volume of hedging of investments in the US by selling the greenback.
The only factor preventing EURUSD bears from capitulating is the unrelenting rally of US stock indices, driven by the prevailing sentiment in the market. Individual investors are currently exhibiting high levels of greed, and they are using the de-escalation of trade conflicts as an opportunity to purchase stocks. Meanwhile, the US administration has had limited success apart from agreements with the UK and China.
US Foreign Trade with EU, Japan, and South Korea
Source: Wall Street Journal.
Furthermore, the swift agreement to end the trade war between Washington and Beijing caught US allies off guard. They are revising their views on the negotiations and are no longer prepared to compromise. The EU is unlikely to agree to a deal similar to that of the UK, while Japan and South Korea will continue to insist on the elimination of the 25% tariff on cars. The United States' significant foreign trade surplus is largely attributable to its partnerships with these nations.
Weekly EURUSD Trading Plan
Escalating trade conflicts could trigger a decline in the S&P 500 index, prompting EURUSD bulls to start a full-fledged rally. Against this backdrop, long positions can be opened on pullbacks and on a breakout of the resistance level of 1.1225.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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