USD: wrong way. Forecast as of 12.10.2023

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All new trends emerge when no one believes in them. Will the EURUSD decline for six trading days in a row be the start of a new trend? Let’s discuss this topic and make up a trading plan.

Weekly US dollar fundamental forecast

The USD index marked its longest weakening period in more than three years. Amid lower Treasury yields due to geopolitical factors and neutral comments from Fed officials, the dollar declined significantly. All attempts by Fed officials to save the US economy so far do not look very encouraging. As a result, the EURUSD correction may develop into a trend reversal.

The markets practically did not react to the minutes of the September FOMC meeting, although some officials considered that the cycle of monetary restriction was completed. Surveys of primary dealers suggest that the federal funds rate will remain at 5.5% until March 2024 and that inflation expectations are firmly anchored.

In October, investors have a different mantra. “The financial markets are doing the Fed’s job,” said Christopher Waller. Therefore, the central bank can stick to the wait-and-see approach. Other FOMC officials share the same opinion. It changed the market’s views. As a result, Treasury yields began to decline, stock indices rose, and the US dollar fell.

Most likely, Fed officials believe that monetary tightening has gone too far and that a recession may begin. The Central Bank is counting on a soft landing or the so-called golden path for the United States. By the way, the reduction in the inversion of the yield curve also indicates an approaching recession. This dynamic has led to a decline in US GDP in the past.

Dynamics of Treasury yield curve

 Source: Wall Street Journal.

The idea of keeping rates at a plateau for a long time deserves respect. However, according to BNP Paribas, this requires inflation to remain constant over a long period. It’s hard to imagine this after the increased volatility of 2022-2023. In order to bring down high prices, the Fed had to resort to the most aggressive monetary restriction in decades. If CPI and PCE continue to slow down at the same pace as now, the markets will once again begin to discuss the dovish reversal. This could also give a start to the era of USD weakening.

It is not surprising that investors continue to react vividly to inflation dynamics. Thus, a slowdown in PPI to 2.2% and basic producer prices to 2.8% YoY led to EURUSD growth for six days in a row. The market is eagerly awaiting consumer price data. According to Bloomberg experts, the CPI growth rate will fall from 3.7% to 3.6% and core inflation from 4.3% to 4.1% YoY. This will further reduce the possibility of a federal funds rate hike to 5.75% in 2023 and weaken the US dollar.

Weekly EURUSD trading plan

So far, the EURUSD rally looks like a correction, but the revival of the Fed’s dovish reversal idea could provoke a more serious upward movement of the pair. Stick to long trades entered at 1.0585. After breaking out the resistance at 1.065, it will be possible to add up to them.

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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