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If Israel does not respond to Iranian airstrikes, it will be seen as weak. If retaliation takes place, the EURUSD risks falling even deeper. Moreover, the US economy is thriving. Let’s talk about these topics and draw up a trading plan.
Weekly US dollar fundamental forecast
You can’t stop consumers when they’re employed, and wage growth is near multi-year highs. An explosion in US retail sales rocked bond and currency markets, sending the USD index soaring to five-month highs. The stronger consumer demand and the stronger the economy, the less likely the Fed will cut the federal funds rate in 2024. It even might start raising it in early 2025. This is sad news for EURUSD bulls.
In March, retail sales grew by 0.7%, the basic indicator – by 1.1%, significantly exceeding the forecasts of Bloomberg experts. Data for February were revised up, supporting the idea of American exceptionalism. Goldman Sachs raised its US GDP forecast for the first quarter from 2.5% to 3.1%, and Jefferies – from 2.2% to 3.1%. A leading indicator from the Atlanta Fed signals the economy will expand to 2.8%. Can the euro area, with its anemic economic growth, compete?
Dynamics of US retail sales
Source: Bloomberg.
According to the UBS, the combination of impressive GDP growth and accelerating inflation creates the preconditions for a resumption of the Fed’s monetary tightening cycle. If the situation continues to heat up, the central bank will not lower the federal funds rate in 2024 but will begin to raise it in early 2025. By the middle of next year, borrowing costs could rise to 6.5%, providing strong support for the US dollar.
It is not surprising that speculators increased the greenback net longs to the highest levels since August 2022, and the USD risk reversals reached the highest levels since November. Demand for call options is off the charts.
Dynamics of USD and its risk reversals
Source: Bloomberg.
The derivatives market gives a 23% probability of the first federal funds rate cut in June, 48% in July, and 72% in September. The chances of the Federal Reserve’s two acts of monetary expansion in 2024 are estimated as fifty-fifty, although just a week ago, the risks of three Fed’s rate cuts were 65%.
The situation is fueled by the escalation of the geopolitical conflict in the Middle East. Judging by the emergency meeting of the war cabinet, Israel intends to take revenge on Iran for airstrikes on its territory, which returned Brent above $90 per barrel, pressed down the S&P 500, and increased demand for greenback as a safe-haven asset. At the same time, if there is no response from Israel, a decrease in the degree of geopolitical risks, stronger China’s domestic data than expected, and an improvement in the IMF forecasts for the global economy can support the euro as a pro-cyclical currency.
Weekly EURUSD trading plan
As a result, traders will have a great opportunity to sell it at a higher price with targets of $1.06 and $1.05. After all, when FOMC officials begin to abandon their plans, all is lost for the EURUSD. Mary Daly sees no urgency in monetary easing, and John Williams has begun to speak in the subjunctive mood. If inflation slows down, the Fed might cut rates this year.
Price chart of EURUSD in real time mode
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