As the EURUSD pair declines, the frustration among market participants, largely influenced by major banks, intensifies. The major currency pair was expected to reach 1.2 or above. However, they were wrong in their assessments. Let's discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The break-even employment rate has fallen to 30,000.
- Inflation growth is more reminiscent of the 1970s than of the pandemic era.
- The Fed may not meet market expectations.
- Short trades on the EURUSD pair can be opened if the price fails to break above 1.16.
Weekly US Dollar Fundamental Forecast
The collapse of the EURUSD pair caught major banks such as JP Morgan, Goldman Sachs, Morgan Stanley, Citigroup, and Bank of America off guard. They expected the major currency pair to continue its rally by approximately 4% by the end of the year. In fact, the USD index rose to a two-month high amid events in Japan, France, the shutdown, and divisions within the Fed.
Wall Street Expectations for Euro, Yen, and Pound
Source: Bloomberg.
US dollar bulls far outnumber the five credit institutions. For instance, MUFG Bank anticipates a rise in the euro to $1.2 if the ongoing political crisis in France subsides. However, mass support can also present certain challenges. If the crowd were always right, the Sun would still orbit the Earth.
The USD index slumped by 10% during the first half of the year, initially due to the "Sell America" strategy against the backdrop of Donald Trump's tariffs and then due to currency risk hedging by non-residents. This suggests that the US dollar may be oversold. The US administration will not pressure the Fed to aggressively cut rates, and tariffs have not caused a freeze in the US labor market and economy. Research by the Federal Reserve Bank of Dallas indicates that the decline in immigration has led to a decrease in the break-even employment rate to 30,000. This suggests that the unemployment rate is unlikely to increase, which provides the Fed with no urgency to act.
US Non Farm Payrolls
Source: Bloomberg.
When we consider the results of the Boston Fed's research, a shift in the upward trend for the EURUSD pair becomes a distinct possibility. According to the bank, the rising tide of inflation expectations is considered more analogous to the 1970s than the pandemic. In 2020, consumers feared a surge in food prices. However, the CPI spike proved to be temporary. Half a century ago, this affected a wide range of goods, so inflation proved to be more sticky. If it anchors near 3% now, the Fed will not cut rates sharply. Moreover, the US regulator may make a pause in the cycle.
As a result, investors are returning to the US dollar. Once the markets have adjusted to a series of aggressive federal funds rate cuts, it will be challenging to meet their expectations without a substantial cooling of the labor market. The potential risks associated with a reversal in the greenback are leaning towards the upside, indicating a possible correction in the USD index.
US Dollar Risk Reversals
Source: Bloomberg.
EURUSD bulls had hoped that the shutdown would force the Fed to ease monetary policy. However, negotiations between Democrats and Republicans are improving the chances of a quick resolution.
Weekly EURUSD Trading Plan
Only a return of the EURUSD pair above 1.16 will allow traders to increase long trades formed at 1.1545. If the major currency pair fails to break through this resistance level in the coming days, short positions can be considered.
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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