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The dollar advantages seem to be relevant at first glance. They are the US economic strength, the Fed’s patience, geopolitics, and the presidential elections. Nonetheless, the EURUSD is rising. What are the reasons? Let’s discuss the Forex outlook and draw up a trading plan.
Weekly US dollar fundamental forecast
The US economy is strong, but the dollar is not growing. US Treasury yields have risen to their highest levels since November, but the greenback shows no sign of strengthening. Chances of a federal funds rate cut in June have fallen below 50%, but EURUSD is heading higher. What’s happening? Have the euro bears run out of benefits? Perhaps the headwind for the euro has suddenly changed to a tailwind?
At the beginning of the year, the derivatives market was counting on a Fed rate cut by 150 basis points, and Bloomberg experts predicted US GDP expansion in 2024 by only 0.9%. However, at the beginning of April, derivatives suggested a rate cut by 62 basis points, and experts increased their estimates of economic growth to 2.2%.
Dynamics of market expectations for Fed’s rate
Source: Reuters.
The US jobs report confirmed the US economic resilience. An increase in employment by 303,000 and a decrease in unemployment are signs of strong consumer demand, which forms a significant share of GDP. The economy is strong, with the Atlanta Fed leading indicator signaling expansion of 2.8% in the first quarter.
Meanwhile, PIMCO has cut its forecast for the number of Fed rate cuts in 2024 to two, and fewer investors think inflation will return to 2% on a sustainable basis. At the same time, the rally in commodity market indexes supports the growth in consumer prices. If so, why would the Fed cut rates at all?
Dynamics of S&P 500 and Commodity Market Index
Source: Wall Street Journal.
In addition to the strong economy and a change in investors’ outlook on the federal funds rate, it turns out that EURUSD should confidently move towards parity. But the pair is growing!
The euro is a pro-cyclical currency that is sensitive to improvements in the global economy. In this regard, positive news from China and the euro area, coupled with the US economic resilience, create the preconditions for the EURUSD growth. Thus, German industrial production increased by 2.1% in February, the second month in a row, and the European Sentix index rose to its highest since February 2022. Furthermore, the S&P 500 is close to record highs, which means a high global risk appetite, strengthening the euro.
Nonetheless, I don’t think the euro will rise high. Investors are looking forward to the US inflation data for March, hoping to understand whether the January and February spikes were bumps in the CPI’s downtrend or whether consumer prices will begin to chart a new peak. If the actual report exceeds the Bloomberg experts’ forecast of 3.4% annualized and 0.3% monthly, the EURUSD bulls will be set back.
Weekly EURUSD trading plan
However, for now, the euro buyers are trying to win back European positivity and faith in the global economy’s recovery. Will EURUSD bulls have enough strength to consolidate the price above 1.0845? If not, it will be relevant to sell.
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.
