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The EURUSD‘s trend is data-dependent. The release of strong US stats tipped the scales in bears’ favor. For how long? Will bulls come to their senses quickly and regain the initiative? Let’s discuss it and make a trading plan.
Weekly fundamental forecast for dollar
If the market reacts so strongly to the first increase in US consumer confidence in four months, then all is not lost for the US dollar. The rise of the Conference Board indicator from 97.5 to 102 in May caught investors off guard. The value exceeded all estimates of Bloomberg experts, and previous data were revised upward. The increase in 12-month inflation expectations from 5.3% to 5.4% and the rise in the share of respondents expecting future rates to grow from 55.2% to 56.2% was an even bigger blow for EURUSD bulls.
US Consumer Confidence Trends
Source: Bloomberg.
President of the Minneapolis Federal Reserve Neel Kashkari says fed funds rate hikes aren’t “off the table.” Even though the chance is quite low, FOMC members will unlikely rule out this scenario.
These statements led to a surge in treasury yields amid unexpectedly strong consumer confidence data and poor 2-year and 5-year auctions. Bond yields returned to the levels from which they fell after the release of the US labor market report in April. The chances of a federal funds rate cut in September collapsed to 44%, and the derivatives market’s estimates for the Fed’s monetary expansion in 2024 fell to 34 bps.
The Fed will not cut rates as the US economy is very strong. Should we dump the American dollar in such conditions? The failure of the EURUSD’s bulls to update May’s high indicates their weakness. The market’s violent reaction to the US consumer confidence data points out that investors are not confident that the main currency pair’s downward will be broken. The greenback will fight again!
Moreover, in contrast to the US, European inflation expectations continue to slow down. In April, the 12-month indicator fell from 3% to 2.9%. This increases the odds of inflation returning quickly to the 2% target and cutting the ECB’s deposit rate following the Governing Council’s first move in June.
Market expectations of inflation in Europe
Source: Bloomberg.
Despite the flight of the EURUSD bulls from the battlefield on the eve of victory, I would not sprinkle ashes on my head. The global economy has become stronger compared to last year, as indicated by the upgrade from 4.6% to 5% in the IMF forecast for China’s GDP for 2024. In 2022-2023, the focus was on American exceptionalism, which helped the US dollar strengthen against major world currencies, but now global economic growth is synchronizing. This environment is excellent for procyclical currencies like the euro and the pound.
Weekly trading plan for EURUSD
The EURUSD‘s further trends will depend on data. The main currency pair will likely correct to 1.08 and lower. However, if the bulls quickly come to their senses and push quotes above 1.086 and 1.0885, we will have a reason to buy the euro against the US dollar.
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.
