USD: only game in town. Forecast as of 01.11.2023

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Market participants are tired of USD purchases, but the euro is not strong enough to reverse the EURUSD downtrend. The eurozone economy lags significantly behind the US, and the Fed leaves room for rate hikes. Let’s discuss this topic and make up a trading plan.

Weekly US dollar fundamental forecast

If the market does not go where it is expected, chances are high that it will move in the opposite direction. In October, the US dollar failed to take advantage of the rally in Treasury yields and strong macroeconomic data. According to NAB, long greenback trades create a headwind for any further action. This was proven by weak eurozone data, which led to EURUSD growth.

Since eurozone inflation fell to 2.9% and GDP contracted by 0.1%, the ECB’s actions are effective. Ten acts of monetary restriction have reduced domestic demand, but many on Forex talk about a political mistake. They say that the eurozone economy has been lagging behind the American economy in growth rates since the global economic crisis of 2008. The pandemic and the war in Ukraine have widened the gap, as they have had a negative impact on supply chains. It is also worth noting that the United States benefited from the energy crisis.

Eurozone inflation dynamics

Source: Financial Times.

Even though one-month US dollar risk reversals have fallen to the very bottom since late July, indicating investor reluctance to buy greenback at current levels, the USD remains the only game in town. The market has no alternative, while American exceptionalism and high rates continue to support EURUSD bears.

There is another factor that convinces us that the rumors about the USD collapse, spread by Barclays, Morgan Stanley, and NAB, are greatly exaggerated. The current situation is very similar to that of the 1970s. Like then, inflation grew uncontrollably, and the Fed kept raising rates. Just like then, a crisis erupted in the Middle East. Half a century ago, consumer prices began to accelerate. Now, they are moving along a similar trajectory.

US inflation dynamics

Source: Bloomberg.

The Fed knows history very well. FOMC officials, in their speeches, are less wary of doing too little to combat high prices. However, they still leave the door open for a federal funds rate hike in 2023. According to former Fed Vice Chairman Richard Clarida, the central bank would rather make huge efforts in December than allow a repeat of the events of the 1970s.

It’s no surprise that investors are expecting a hawkish pause on the October 31-November 1 FOMC meeting. Employment and inflation data for October-November will show whether the monetary restriction cycle is over. In the meantime, statements about its completion can only raise expectations of a dovish Fed reversal.

Weekly EURUSD trading plan

Thus, market participants do not want to buy the US dollar and cannot buy the euro. The result is that the EURUSD consolidation in the range of 1.05-1.07 continues. Sales on growth, including due to euro’s inability to stay above $1.0615, works well. Add up to short trades if the price falls below $1.055.

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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