USD: too tired to grow. Forecast as of 18.10.2023

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Looking at the US-eurozone economic divergence, you can’t help but wonder why EURUSD is not moving towards parity. All in good time. The US dollar weakened slightly, which is beneficial for the euro. Let’s discuss this topic and make up a trading plan.

Weekly US dollar fundamental forecast

Staggering employment data, strong CPI, and impressive retail sales. If the Fed’s policy is truly data-dependent, how can the regulator not raise rates in such a situation? The market believed in the resumption of the monetary restriction cycle, as a result of which the yield on 10-year US Treasury bonds returned to its highest levels since 2007, and the chances of an increase in borrowing costs rose to 44% in December and 49% in January. However, instead of falling, EURUSD unexpectedly rose. Is the dollar getting bored with the old drivers?

Retail sales growth of 0.6% MoM in September, an upward revision of data for July and August, allowed Goldman Sachs to raise its GDP estimate for the third quarter by 0.3 pp to 4%. Looking at the dying eurozone, you can’t help but wonder how divergence in economic growth does not lead the main currency pair to parity. In July-September, a rapid rally in Treasury yields brought EURUSD to its annual bottom. Why is this advantage of the US dollar not working now?

Dynamics of EURUSD and Treasury yields

Source: Trading Economics.

In fact, one of the factors behind the EURUSD decline was the status of the greenback as a safe-haven asset. Rising debt market rates led to a decline in US stock indices. Today, shares are in no rush to fall. Investors understand they have entered the Goldilocks regime of strong economic growth and slowing inflation. Ideal conditions for risky assets.

The statements of FOMC officials raise many questions. If the data is so strong, why is Richmond Fed President Thomas Barkin saying inflation is falling due to slowing domestic demand? According to him, the pandemic economy is forgotten, savings are almost spent, and fiscal stimulus is over. What’s the matter? What is the meaning of the new mantra that the bond market does part of the central bank’s job? Perhaps to signal that the Fed funds rate will not rise again?

Investors are confused. In addition, the desire of the United States and Europe to resolve the conflict in Israel diplomatically leads to a fall in oil prices, which is beneficial for the eurozone, which is a net importer of energy resources, and its currency.

Thus, despite all the difficulties, including a sluggish economy, the reluctance of the ECB to further raise rates, problems with fiscal discipline in Italy, and the risks of a return of the energy crisis, the euro is growing against the US dollar. Investors are gradually exiting their EURUSD short trades, believing that the greenback’s inability to grow against a favorable background is a sign of its weakness.

Weekly EURUSD trading plan

A successful breakout of the resistance at 1.059 could give new impetus to the EURUSD rise. However, the consolidation scenario in the range of 1.05-1.07 described in the previous forecast is more likely than a strong euro rally towards $1.1. Due to this, don’t focus on purchases. Look for opportunities to enter sales on growth.

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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