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The EURUSD bears are going ahead. This time, the reason to sell has been the ISM PMI report. And that is only the beginning.
Weekly Euro fundamental forecast
When even weak sectors of the US economy show positive signs, the US dollar sellers have to step back. The first expansion of the US manufacturing PMI reported by the ISM since September 2022 triggered the fastest jumps in Treasury yields and falls in stock indices. The favorable background encouraged the EURUSD bears to drive the price close to 1.07.
Bloomberg experts were surprised by the 2.5-point increase in the purchasing managers’ index in the manufacturing sector to 50.3 in March. None of them included such a high PMI value in their forecasts. Both production and demand have increased, and resource costs have risen, threatening inflation to accelerate further.
Dynamics of US manufacturing PMI and its components
Source: Bloomberg.
If even the weakest parts of the US economy are showing signs of recovery after 16 months of contraction, the GDP rate will hardly slow down. Traders reduced the likelihood of the Fed easing monetary policy in June. At this point, the odds of a federal funds rate cut in early summer fell below 50%, and the estimated scale of monetary expansion in 2024 fell to 65 basis points. This is a lower figure than in the FOMC’s March forecasts.
Investors recalled Christopher Waller’s suggestion that the Federal Reserve should delay the start of monetary easing and Jerome Powell’s statement that the central bank can afford to be patient. As a result, Treasury yields and the US dollar rose.
Dynamics of forecasts for federal funds rate
Source: Bloomberg.
EURUSD bears were also supported by the drop in the US stock indices. The S&P 500, after an impressive first quarter, the best since 2019, closed in the red as manufacturing PMI rose above 50. In the options market, betting on a small stock market correction is not as popular as betting on a dramatic drop. The demand for put contracts that insure against such a scenario is extremely high.
If the S&P 500 crashes down from its all-time highs, it will provide fresh momentum in strengthening the dollar as a safe-haven asset.
According to the dollar smile theory, the dollar strengthens when everything is good or, on the contrary, when everything is bad. The US economy is currently thriving, and US exceptionalism is pressing down the EURUSD. If chaos breaks out in the financial markets, provoked by the collapse of stock indices, the major currency pair will confidently move towards parity.
Weekly EURUSD trading plan
If a modest manufacturing PMI caused such a strong reaction, then what can we expect from the US jobs report for March? EURUSD has weathered the storm and is preparing for the next one, coming very close to the target at 1.07 on previously opened short positions. I recommend holding down short trades.
Price chart of EURUSD in real time mode
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