EURUSD correction accelerated after divergences in eurozone-US business activity. The European data is disappointing, while the American is positive. These are the necessary conditions for the trend breakout. Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
The dollar usually falls when things are good outside the US. Alas, the economies of China and the Eurozone do not meet expectations. After the unexpected collapse of the European manufacturing PMI to the lowest level since the pandemic shut down factories, the divergence in economic growth no longer supports EURUSD. The correction continues. The deeper it becomes, the more likely it is to break out the uptrend.
Eurozone PMI dynamics
Source: Bloomberg.
The US composite PMI rose to a 13-month high. This indicates the resilience of the US economy to the Fed’s aggressive monetary restriction, which creates headaches for central bank officials. In order to defeat inflation, it is necessary to cool economic activity. While it is hot, rates should be increased. The futures market increased the chances of their growth in July to 42%, which supported the EURUSD bears.
On the contrary, a weak European PMI could become a deterrent for the ECB. According to Goldman Sachs, the divergence in eurozone-US monetary policy is not that big. Together with the disappointing eurozone and Chinese PMI, this gives the US dollar more room to strengthen in the short term. In the long term, the greenback’s depreciation is more limited than the market expects. The bank kept the forecast for EURUSD at 1.1 at the end of 2023 unchanged.
What is holding back the dollar from further strengthening? In my opinion, this is a debt ceiling issue. Even though earlier everything ended happily, time is running out. Thus, the US risks discrediting itself just like the eurozone with its debt crisis and Japan with the yen’s devaluation. As a result, European and Asian accounts have been actively buying up treasuries over the past years. Due to the default, cash flows can move to other markets.
On the contrary, an agreement between Republicans and Democrats will lower EURUSD even more. I doubt the uptrend will be broken out and the pair will return to parity. The Fed intends to act according to the situation while US inflation in the US continues to slow down. In order to be sure of this, you need to understand the reasons for its acceleration to the 40-year high. The first is monetary and fiscal stimulus due to the pandemic. The second is supply chain disruption. Both have been solved or are starting to be solved.
Structure and dynamics of US inflation
Source: Wall Street Journal.
Weekly EURUSD trading plan
It is unlikely that the federal funds rate will rise above 5.5% in the current cycle. But I believe that the Chinese recovery will support the export-oriented eurozone. Euro will recover later. In the meantime, EURUSD‘s inability to hold above 1.076 will increase the risks of the pair falling to 1.0715 and 1.0665.
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.
