In 2022-2023, the US dollar was the absolute leader in Forex due to divergence in monetary policy and American exceptionalism. However, in 2024, the situation will change. Let’s discuss this topic and make up a trading plan EURUSD.
Fundamental US dollar forecast for six months
While EURUSD is consolidating in anticipation of the release of US inflation data for October, there is an opportunity to speculate about the medium and long-term prospects of the main currency pair. In 2022-2023, the US dollar was the undisputed leader in Forex, but in 2024, the situation will change dramatically. However, at the beginning of this year, there were many speculations that the euro would remove the greenback from the throne. But they turned out to be wrong.
Then, the logic of investors was simple: the ECB began raising the deposit rate later than the Fed, which means it should finish it later. The lagging cycle of monetary tightening and the forgotten energy crisis promised EURUSD bulls good prospects. However, the consequences of the war in Ukraine turned out to be more noticeable than expected. The economy weakened, and the European Central Bank finished raising deposit rates around the same time as the Federal Reserve.
The US central bank significantly reduced inflation by increasing borrowing costs by 425 bps in 2022 and 100 bps in 2023. At the same time, FOMC officials considered the example of the 1970s and 1980s, when consumer prices, after declining, reached a new high. They remained hawkish. This circumstance, together with the rapid and significant increase in the federal funds rate, became important drivers of the EURUSD decline.
US inflation dynamics
Source: Bloomberg.
In theory, each step of monetary restriction by 100 bps reduces domestic demand by 1 pp. The effect will be felt next year. This means that in 2023, US GDP should be about 4 pp less than it would be without rising borrowing costs. However, in fact, over nine months, the economy expanded by 2.9%, including 4.9% in the third quarter.
The main reason is the large-scale fiscal stimulus during the pandemic, which resulted in an increase in excess savings and provided significant support to domestic demand. Stimulus checks from Donald Trump in 2020-2021 were estimated at 3% of GDP, and the expansion of government spending due to various programs at 2%. This will not happen in 2024. The US economy risks cooling significantly, and the dollar will lose such an advantage as American exceptionalism.
The important factors are the eurozone’s ability to avoid a recession, which is quite likely given the imminent end of the crisis in the Middle East and falling energy prices, as well as the acceleration of the Chinese economy. The USD index tends to decline when the global economy is stronger than the US economy. In this regard, the improvement of the situation among the main competitors of the United States is an important argument in favor of buying EURUSD.
EURUSD trading plan for six months
Greenback has lost such advantages as divergence in monetary policy and economic growth. However, if we take into account the factor of improving global risk appetite due to expectations of a Fed’s dovish reversal, it becomes clear that the main currency pair will rise. EURUSD could grow to 1.095, 1.105 and 1.12 in 3,6 and 9 months. I recommend entering purchases.
Price chart of EURUSD in real time mode
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