Political factors weigh on the yen and the euro, trade wars exert pressure on the Canadian dollar, central bank policies put pressure on the New Zealand dollar, and fiscal uncertainty hampers the pound. The US dollar is taking advantage of the vulnerabilities of each of its counterparts. Let's discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The French president's power is wavering.
- The US government shutdown shows no signs of ending.
- The Fed may skip one rate cut in 2025.
- Long trades on the EURUSD pair can be opened at 1.159 and 1.1545.
Weekly US Dollar Fundamental Forecast
The US dollar has become the standout asset when compared to other major global currencies. Although some investors prefer alternatives such as bitcoin or gold, which are not subject to the same constraints, many investors still favor the traditional options. When threats to the Bank of Japan's independence weaken the yen, the new budget proposal causes the pound to lose value, the ongoing political crisis in France hurts the euro, the trade war affects the Canadian dollar, and the significant decline in interest rates pushes its New Zealand counterpart down, the greenback stands to benefit.
Europe is a museum, Japan is a nursing home, China is a prison, and Bitcoin is an experiment. In October, former US Secretary Larry Summers' wit has become particularly relevant. In essence, every joke contains a degree of truth. In the spring, investors divested from the US dollar as part of the once-popular "Sell America" strategy. However, in the fall, they have turned to the greenback again, seeing no viable alternatives. The US currency's primary competitors appear to have strategically exposed their vulnerabilities.
France-Germany 10-Year Bond Yield Spread
Source: Bloomberg.
In France, Emmanuel Macron is being abandoned even by his former supporters. The head of his Renaissance party and former Prime Minister Gabriel Attal said that he no longer understood the French president. He considers the 2024 parliamentary elections to be a mistake on the part of the head of state. Judging by the increase in the yield spread between French and German bonds from 42 bps at that time to the current 86 bps, this is indeed the case.
Curiously, investors' opinions on the situation in the French debt market differ radically. Goldman Sachs believes that the rise in yields indicates that the factor of early parliamentary elections has already been taken into account. On the contrary, Citigroup suggests that it is only beginning to be reflected in bond prices and the EURUSD pair. If the first bank is right, the euro will soon find the bottom. If the second is correct, it will continue to fall.
Market Expectations for Fed Rate
Source: Bloomberg.
The main vulnerability of the US dollar is the expectation that the Fed will cut the federal funds rate. However, the longer the shutdown lasts, the higher the probability of missing one of the two cuts predicted by the derivatives market in 2025. Donald Trump seemed to have made it clear that he was ready to negotiate with the Democrats, but then took a step back, refraining from negotiations until they stop the government shutdown.
According to Minneapolis Fed President Neel Kashkari, a sharp drop in rates will spur US inflation. Indeed, according to research by the New York Fed, annual consumer inflation expectations rose from 3.2% to 3.4%, and five-year expectations rose from 2.9% to 3%.
US Inflation Rate Expectations
Source: Bloomberg.
Weekly EURUSD Trading Plan
If the Fed does not cut rates twice in 2025, the US dollar will strengthen even further against its extremely vulnerable competitors. Against this backdrop, it is dangerous to catch falling knives on the EURUSD pair. Only a rebound from 1.159 and 1.1545 will allow traders to open long positions.
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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