Will a rally in Treasury yields help EURUSD bears? Will bulls take advantage of the USD’s seasonal weakness towards the end of the year instead? But what if both factors no longer work? Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
The traditional theory that raising rates cools both the economy and inflation no longer works. US GDP expanded by 4.9% in the third quarter, and the 6-month PCE in September fell to 2.8%, approaching the Fed target. Treasury yields have jumped to 5%, but their rally is no longer leading to the USD strengthening as before. Is it worth counting on the EURUSD seasonal strength when all the old patterns no longer work?
Rising risk appetite, holiday trade flows, and closing balance sheets at the end of the year usually make the US dollar an underdog. Since 2017, the greenback has never finished December in the green. The USD indexe’s seasonal weakness began to manifest itself at the end of autumn. As a result, four out of six times, the US dollar ended November in the red. However, in 2023, real bond yield spreads and geopolitical risk are so high, so you better not count on this pattern.
Seasonal dynamics of the US dollar
At the turn of autumn and winter, so many events will happen in the market. Release of European inflation and GDP data, as well as the US labor market report for October, BoJ, and Fed meetings… so expect strong EURUSD fluctuations.
The most interesting thing is that the key event of the week may be the announcement by the Treasury on the volume of bond issues for the quarter. In August, it triggered a sell-off in Treasuries, pushed 10-year yields to 5% (their highest since 2007), and made EURUSD end in red 13 of the last 15 weeks. Then, the $103 billion figure was mind-boggling. Now, primary dealers are talking about $114 billion.
Dynamics of US Treasury yields
In August-September, many believed that the rally in US debt market rates would cause the Fed to tighten monetary policy (which also strengthened the US dollar). However, in October, the situation changed. FOMC officials convinced investors that the bond market was doing the central bank’s job. As a result, the odds of a federal funds rate hike fell from nearly 50% to 24% in December. EURUSD no longer flies into the abyss when Treasury yields rise and begins to strengthen in response when it falls.
Weekly EURUSD trading plan
Traditional patterns stop working. The market needs new ones, and investors are hoping the busy week will provide them with clues. In the meantime, prepare for strong fluctuations. If the FOMC meeting and the labor market report could negatively impact the US dollar, then slowing inflation and contraction in eurozone GDP could weaken the euro. Don’t forget about the Bank of Japan meeting, the Fed’s statement on bond issuance, and the conflict in the Middle East. These factors will cause EURUSD to fluctuate from one part of the 1.05-1.07 trading range to the other. Continue sales on the rise and purchases on the decline.
Price chart of EURUSD in real time mode
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