The introduction of import duties on the supply of European cars to China or a crackdown on German companies doing business in the country would be a new blow to the already weak eurozone economy. Let’s discuss this topic and make up a trading plan for EURUSD.
Daily Euro fundamental forecast
With the euro posting its worst 9-week performance in history and hedge funds adding up to their long USD trades in 6 of the last 7 weeks, many are starting to wonder when the downturn will begin. Speculators are ordinary people who are influenced by emotions. In addition, many bearish factors have already been priced in EURUSD quotes. However, new reasons for selling may arise, which will worsen the situation.
For the first time since March, hedge funds have become bullish against the greenback vs. eight major world currencies. For the first time since November, hedge funds are about to exit the red zone against the G10 currencies, the Mexican peso and the Brazilian real. Divergence in economic growth and American exceptionalism helped EURUSD bears. But is this enough for the pair to return to parity?
Dynamics of net dollar long/short positioning in futures
Source: Bloomberg.
One of the main trump cards of the greenback is investors’ faith in a soft landing of the US economy, while the European one is mired in stagflation. However, before 1990, 2001, and 2007 recessions, many Wall Street experts also talked about a soft landing. Avoiding a recession requires a lot of luck. US resistance to the Fed’s monetary restriction ultimately leads to a new surge in inflation. On the contrary, everything that reduces demand provokes an increase in unemployment. This process is difficult to stop.
Thus, the Fed may only temporarily achieve a soft landing. There will be a recession. Most likely in 2024. Next year, the US dollar will no longer dominate Forex as before. At the same time, markets rise or fall on expectations, so belief in the “overthrow” of the dollar can cause EURUSD to rise in the fourth quarter. Unless, of course, the euro bears have new trump cards.
After the pre-trial proceedings in Brussels regarding Chinese electric vehicles, German manufacturers became very nervous. There is growing concern in Europe that Beijing, which has previously engaged in a trade war with Washington, may take punitive measures of its own against the EU auto industry. The share of Volkswagen’s products sold in PRC is 40%, Mercedes-Benz’s is 37%, and other companies are somewhere nearby. The introduction of import duties will be the same blow to the eurozone as the shutdown of Russian gas in 2022.
Share of Chinese car retail sales
Source: Financial Times.
However, EURUSD bears are being helped by the uncontrollably rising oil price. Brent approaching $100 per barrel is fueling inflation in the US, forcing the Fed to closely monitor the possibility of further rate hikes. This fact also deals a blow to the eurozone as an importer of commodities.
Daily EURUSD trading plan
Thus, EURUSD bulls dream of closing many speculative shorts but are wary of new bearish drivers for the euro. In such a situation, a signal is required, which will most likely come from the Fed. For now, it makes sense to stay out of the market.
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.
