USD: looking for owner. Forecast as of 20.10.2023

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What influences EURUSD more? Geopolitics, Fed or US Treasuries? The main currency pair fluctuated strongly, reacting to all three drivers. What’s next? Let’s discuss this topic and make up a trading plan.

Weekly US dollar fundamental forecast

Jerome Powell confirmed the opinion of his FOMC colleagues that the rally in Treasury yields is doing a part of the central bank’s job. They say that any rate increase is aimed at tightening financial conditions, and the situation in the US Treasury bond market contributes to this. However, while investors are figuring out what is more important, monetary policy or the highest yield on debt since 2007, the geopolitical factor has come to the fore.

The Fed Chairman provoked strong fluctuations in both stocks and Treasuries. First, Jerome Powell hinted that a federal funds rate hike in November was unlikely. In the face of both old and new uncertainties, the central bank intends to act cautiously. But he then said the Fed was prepared to raise borrowing costs again if strong economic activity raised concerns about accelerating inflation.

Reaction of stocks and bonds to Powell’s speech

  

Source: Bloomberg.

Market concerns peaked when Jerome Powell noted that he saw no evidence that monetary policy was too tight and that high rates would be required for an extended period.

Thus, the Fed intends to pause for the second time in a row in November but does not rule out resuming tightenings in the future. This is fully in line with market expectations: derivatives give a 99% chance of maintaining borrowing costs at 5.5% at the next FOMC meeting, as well as 24% and 37% chances of its increase in December and January, respectively. It is curious that after Jerome Powell’s speech, there were minor risks of easing monetary policy at the upcoming Fed meetings. It seems that the market considered the Fed chairman’s speech less hawkish than initially expected.

This circumstance, together with a decrease in Treasury yields, helps explain the EURUSD growth. Moreover, oil weakened after the US announced that it would lift some of the sanctions against Venezuela for six months. According to Energy Aspects forecasts, oil production in this country could increase by 1 million bpd in 2024.

However, Brent quickly recovered. Six months is not the best time horizon for investors. The political risk has not disappeared, and the oil industry needs time to recover. In addition, the crisis in the Middle East continues to stir financial markets. The US says drone attacks are intensifying in Syria and Iraq, a US destroyer has intercepted cruise missiles fired at Israel from Yemen, and Jerusalem is not abandoning its plans to invade Gaza.

Weekly EURUSD trading plan

Thus, it is unclear what exactly triggered the strong EURUSD fluctuations. Was it Jerome Powell’s speech or an oil price fall followed by a rise? I guess both factors. As a result, the main currency pair tends to consolidate in the range of 1.05-1.07. Thus, continue to sell it on the rise and buy it on the decline.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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