Risks of escalating conflict in the Middle East, fears of an AI bubble bursting, worsening tensions in France, and uncertainty surrounding the midterm elections are pushing Treasury yields lower. Let's discuss this topic and make a trading plan for EUR/USD.
The article covers the following subjects:
Major Takeaways
- Rising oil prices are not helping the US dollar.
- Investors are hedging against the risk of an AI bubble bursting.
- The Fed's inaction is weighing on the greenback.
- A breakout above 1.126 would provide an opportunity to buy EUR/USD.
Weekly Fundamental Forecast for Dollar
The US dollar is a safe-haven asset. But what if it is losing that status? EUR/USD bears have been unable to benefit from any of the factors that drove the pair's sharp decline from August to October. Rising oil prices, widening spreads between French and German bond yields, and American exceptionalism have all failed to help. Long-term Treasury yields have fallen to a five-week low as demand for these securities as safe-haven assets increases, preventing the greenback from recovering.
Despite Middle Eastern oil exports returning to pre-war levels, Brent prices are showing no signs of falling. Investors are on edge as they await a possible escalation of the conflict by Iran, which has been backed into a corner. They are also concerned about declining global inventories and rising demand from China and the US. Investors are hedging against geopolitical risks by buying US Treasuries.
Middle Eastern Oil Export Volumes
Source: Bloomberg.
The flight to quality is even more pronounced in the US stock market. Investors have become more selective and demanding with technology companies. Meanwhile, concerns that their financial results may disappoint and that massive investments may not pay off are pushing Treasury yields lower.
The rise in French 10-year government bond yields to their highest levels since 2002 and the widening of their spread over German bond yields to a 15-year high are also telling. Concerned about unrest in Paris, investors are selling some European securities and buying others, namely German government bonds. US investors prefer Treasuries.
French-German Bond Yield Spread
Source: Bloomberg.
Uncertainty surrounding the outcome of the midterm elections in early November is creating another source of demand for US Treasuries. The situation is beginning to resemble 2018, when dissatisfaction with Donald Trump's policies raised the prospect of a so-called blue wave, with Democrats potentially gaining control of Congress. Newly appointed Fed Chair Jerome Powell took a hawkish stance, increasing expectations of monetary tightening.
Probability of Fed Monetary Tightening
Source: Bloomberg.
Stock indices plunged at the time but then recovered quickly, while the futures market gradually moved away from expectations of aggressive rate hikes. If history repeats itself, the US dollar could weaken. Ultimately, the Fed's inaction was the main trigger for the decline in Treasury yields. If the central bank stays on hold until December, EURUSD bulls may have a chance to recover some losses.
Weekly Trading Plan for EUR/USD
The euro's decline may have been too rapid. EUR/USD needs a correction, and a breakout above 1.126 could provide an opportunity to buy the pair. Returning to short positions would make sense below 1.12.
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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