The energy crisis and Europe's debt hurdles are creating favorable conditions for further declines in the EUR/USD. The United States' status as a net exporter of energy commodities, together with improving terms of trade, is providing additional support for the US dollar. Let's examine the key drivers and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US economy could accelerate to 3.7%.
- American exceptionalism is boosting the dollar.
- France cannot withstand high interest rates.
- Short positions can be opened if the EURUSD pair returns below 1.1195.
Weekly Fundamental Forecast for Dollar
The surge in oil prices since the beginning of the year—which is fueling inflation and could potentially hurt the US president's party in the midterm elections—is boosting the US economy. This is largely due to the United States' status as a net exporter of energy products and the resulting improvement in its terms of trade. It is yet another example of American exceptionalism, helping to drive the EUR/USD lower.
According to academic research, including studies from Harvard, oil price shocks had historically been associated with rising unemployment and declining PMIs in the US. That relationship changed after the shale revolution transformed the country from a net oil importer, importing roughly 12 million bpd, into a net exporter, exporting around 3 million bpd. Since then, the impact of higher oil prices has been markedly different: unemployment has declined while PMIs have strengthened.
Terms of Trade in US and Eurozone
Source: Nordea Markets.
Experts argue that the acceleration in economic activity is being driven not by higher export volumes, but by rising export prices—in other words, by an improvement in the terms of trade. Since August, the US and eurozone economies have followed increasingly divergent paths, pointing to a widening gap in GDP growth and pushing the EUR/USD pair down. Indeed, the Federal Reserve Bank of Atlanta's GDPNow model points to 3.7% annualized GDP growth in the third quarter, up from 2.2% in the second quarter.
The resilience of the US economy means it can withstand higher interest rates, while equity markets appear capable of absorbing elevated Treasury yields, which are at their highest levels since 2002. The S&P 500's latest record high is evidence of that resilience. This is another manifestation of American exceptionalism, allowing the US dollar to remain strong even as market expectations for Fed tightening in October have collapsed from 73% to 19% in just a few days.
Meanwhile, the euro is under particularly heavy pressure against the greenback. France’s political and fiscal drama is far from over. Marine Le Pen has proposed addressing the budget deficit by reducing transfers to the EU and cutting immigration-related spending, while also calling on the ECB to lower interest rates to ease the government's debt-servicing burden. Investors remain skeptical of these proposals and continue to sell French government bonds, adding further pressure on the euro.
10-Year Bond Yields
Source: Bloomberg.
Amid heavy selling, French bond yields are rising faster than US Treasury yields. The problem is that the European economy has less room to absorb such an increase. Moreover, the lower the EUR/USD falls, the greater the currency losses for non-resident investors holding euro-denominated assets. This could encourage foreign investors to reduce their exposure and accelerate capital outflows from European markets.
Weekly Trading Plan for EUR/USD
In such conditions, upswings in the EUR/USD toward the resistance levels at 1.129, 1.134, and 1.138, followed by a reversal, or a break below the support level at 1.1195, could provide opportunities to sell the euro.
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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