By increasing energy exports on one hand and reducing imports on the other, the US and China are helping shield the global economy from an oil shock. Can they do more? Let’s discuss this issue and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Markets are keeping a close eye on news from China.
- The Fed is in no hurry, but may raise rates.
- Kevin Warsh is the new Fed chair.
- Short positions initiated at 1.176 on the EUR/USD pair can be increased on upside moves.
Weekly Fundamental Forecast for Dollar
The US and China stand to gain from cooperation and lose from confrontation. That was the message Donald Trump received in Beijing. Oil and Forex markets waited with great anticipation, as much depends on the talks between the leaders of the world’s two largest economies. As a result, the EUR/USD pair held steady amid accelerating US producer prices, which reached their highest levels since 2022.
The US and China are saving the global economy from an oil shock. The former is actively increasing production and exports, lifting sanctions on producer countries, and initiating oil sales from G7 strategic reserves. The latter has significantly reduced imports. These actions underlie the International Energy Agency's sharp downward revision of its forecast for global oil demand. The agency now expects demand to decline in 2026 by 420,000 bpd, not 80,000 bpd as in its previous estimate.
US Producer Prices Change
Source: Wall Street Journal.
Without this cooperation, Brent would have long since surged to the levels seen at the start of the armed conflict in Ukraine. The upward trend in crude prices is at the root of the 6% acceleration in US producer prices in April, the highest rate since 2022. Coupled with consumer prices spiking to 3.8%, the Core Personal Consumption Expenditures (PCE) price index—the Fed's preferred inflation gauge—may be on track to hit 3.3%.
According to Boston Fed President Susan Collins, the conflict in the Middle East is obscuring evidence of a disinflationary trend in the US. However, if the conflict drags on, the FOMC official sees room for a federal funds rate hike.
According to Bank of America, Fed officials' concerns that current monetary policy is already excessively tight, along with the Warsh factor, are headwinds for the EUR/USD rally. Donald Trump's nominee for Fed chair has been confirmed by the Senate. However, the bank notes that one person alone cannot make a difference. It is unlikely that his colleagues will support the chairman's dovish views in the current situation.
US Non-Farm Payrolls, Treasury Yield, and Fed Interest Rate
Source: eFXdata.
The latest figures on employment, inflation, and GDP indicate that current monetary policy is not hindering economic growth. The US can afford even higher interest rates. So much the better for the US dollar.
The US dollar's cautious advance can be attributed to the relentless, record-breaking rally in US stock indices, reflecting strong global risk appetite, as well as investor expectations ahead of upcoming news from Beijing.
Weekly Trading Plan for EUR/USD
The fate of the Strait of Hormuz cannot be decided without Iran, despite the hopes of euro bulls. Meanwhile, the EUR/USD pair continues to consolidate within the 1.168–1.178 range, making upward pullbacks an opportunity to add to short positions initiated at 1.178.
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.
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