The Treasury’s issuance of bonds for more than $1 trillion triggered a rally in Treasury yields and strengthened the US dollar. The Ministry of Finance decided not to repeat the old mistake and allowed the Fed to decide the EURUSD fate. Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
The FOMC’s September forecasts already look erroneous at the end of October. The Fed expected GDP to expand by 2.1% in 2023 and the core PCE index to rise to 3.7%. This requires the economy to contract by 0.7% in the fourth quarter and inflation to accelerate again. If there was an error in the estimates, then the federal funds rate increase may not take place (at least in early November).
The derivatives market forecasts a 98% probability of maintaining the borrowing cost at 5.5%. It looks very plausible. First, the Fed considers the current rate level to be quite restrictive. Secondly, the central bank is confident that the bond market is doing a part of its work. The rise in Treasury yields to 5% (for the first time in 16 years) tightens financial conditions with the help of falling stock indices and the USD strengthening. Deutsche Bank believes that because of it, the American economy will decline by 0.6 pp in 2024, which is equivalent to three acts of monetary restriction of 25 bps each.
The summer surprise from the Treasury is one reason for the rally in debt rates. At the end of July, it announced a planned bond issue of more than $1 trillion in the third quarter, which turned out to be $274 billion more than the previous estimate.
Dynamics of the US budget deficit
Janet Yellen and her colleagues decided not to repeat old mistakes. They plan to borrow $776 billion in the fourth quarter, which is lower than the July estimate of $852 billion. The Treasury forecasts bond issues of $816 billion in January-March 2024. After the publication of these figures, Treasury yields decreased, which allowed EURUSD to strengthen.
This became possible after the release of German inflation and GDP data. Although the German economy contracted by 0.1% in the third quarter, the final figure was less than -0.2%. The slowdown in consumer prices to 3% once again confirms that the ECB’s aggressive monetary restriction is effective. There cannot be high inflation in a weak economy.
Dynamics of German GDP and inflation
These statistics signal that eurozone data may be mixed. Bloomberg experts predict zero economic growth in July-September and a CPI slowdown to 3.1%. On paper, this is negative for EURUSD, but stagflation in the eurozone economy has been known for a long time. Therefore, news of this nature is used for exiting trades before other important events of the week (Federal Reserve meeting and US jobs report). When everyone is buying, there is a great opportunity to sell.
Weekly EURUSD trading plan
Indeed, the EURUSD fate will depend on the US jobs report. A decline in employment in October will be the first sign of a slowdown in the US economy, and continued impulse will tell the Fed that the job is not done. For now, you can stay out of the market or use the euro’s inability to consolidate above $1.0615 to enter sales.
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