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The US dollar gradually recovers after the rout amid decelerating inflation in April. This is mostly driven by FOMC officials’ hawkish speeches and trade wars. Let’s discuss it and make a trading plan for EURUSD.
Weekly fundamental forecast for dollar
There is no wisdom like silence. As there are no important events on the economic calendar, the only thing left to do is listen to what Fed officials have to say. And they unanimously say there is still a long way to go before rates are lowered. Together with the strength of the slowing US economy and threats of new trade wars, this supports the demand for the US dollar and allows the EURUSD bears to counterattack.
Fed Vice Chair Philip Jefferson calls the latest inflation report encouraging, but it is too early to discuss a new long-term downtrend in CPI and PCE. The acceleration of these indicators in the first quarter raised doubts about the disinflationary process. According to the central bank’s calculations, the core personal consumption index grew by 4.1% in January-April, which is certainly too much.
Cleveland Fed President Loretta Mester has already called her idea of three acts of monetary expansion in 2024 inappropriate. Atlanta Fed President Raphael Bostic believes rates must be plateaued longer than projected. Federal Reserve Vice Chair for Supervision Michael Barr says the restrictive policy should be given further time.
These hawkish songs allowed treasury yields to grow for the third consecutive day after a three-week slump, supporting the EURUSD bears.
US/Germany bond yield trends
Source: Nordea Markets.
If FOMC officials were not impressed with the April CPI report, why should the markets be? However, you and I know why the Fed is talking about keeping the federal funds rate plateaued at 5.5%. Since the central bank began tightening monetary policy in 2022, financial conditions have eased to their lowest levels. This means that aggressive monetary restrictions are not producing the desired impact on the economy or inflation.
The situation will worsen if the Fed starts talking about lowering borrowing costs. As a result, the risks of new rate hikes will increase, potentially leading to a recession like in the 1970s, when it was prematurely declared that inflation had been defeated.
The markets understand everything, so US presidential elections and renewed trade wars pose a more severe threat to the EURUSD. Donald Trump has promised to impose tariffs on all imports to fund tax cut programs. The Peterson Institute estimates that this will cost the US 1.8% of GDP, even if China does not respond. Low-income Americans would suffer the most damage, as their disposable income would fall 3.5%.
Impact of Donald Trump’s tariffs on Americans
Source: Financial Times.
Weekly trading plan for EURUSD
Renewed trade wars are awesome news for safe-haven currencies like the US dollar. However, the sentiment remains bullish, and longs should be given preference as long as the EURUSD trades above 1.083. Only a fall below the important support level will create foundations for short-term sales.
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.
