Even if the Fed accelerates its rate cut cycle, the US dollar is unlikely to weaken significantly, given the opportunity for other central banks to take similar action. Let’s discuss this issue and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Highlights and key points
- Regardless of the Fed rate cut pace, the EURUSD rally potential is limited.
- The main problem for the US dollar is the global risk appetite.
- In the long term, the greenback can be harmed by a double deficit.
- If the EURUSD pair plunges below 1.115, consider short trades.
Weekly US dollar fundamental forecast
Some say that one cannot make a difference alone. Tell that to traders awaiting NVIDIA‘s second-quarter corporate earnings report. The company’s revenue is forecast to increase from $13.5 billion to $28.7 billion, while profit is expected to rise from $6.2 billion to $15.1 billion. Positive statistics could boost the shares of the leader in the AI tech sector and the S&P 500. A fresh record high for the stock index will reinforce global appetite for risk and encourage EURUSD bulls to reach new heights.
S&P 500 and NVIDIA performance
Source: Wall Street Journal.
The major currency pair is trading near the 1.12 level for reasons that extend beyond expectations of NVIDIA corporate reports. Investors are also influenced by their perception of the differing rates of monetary expansion by the Fed and the ECB. As Goldman Sachs correctly notes, it is challenging to maintain a bullish outlook on the US dollar in the month leading up to the Fed’s monetary easing cycle. Nevertheless, this factor has already been reflected in EURUSD quotes.
Indeed, should the Fed begin to reduce the federal funds rate gradually, the US dollar will benefit from the significant yield differential between US Treasury bonds and their foreign counterparts. Money will continue to flow to the US, as the attractiveness of assets issued there will remain high.
Conversely, suppose the Fed accelerates its monetary expansion, given the cooling of the US economy. In that case, other central banks can safely increase the speed of monetary easing without putting their currencies at risk. However, this option is less favorable as it requires a recession in the US to occur. Judging by the surge in consumer confidence to a 6-month high, a recession is unlikely to happen shortly.
US consumer confidence index
Source: Bloomberg.
However, the decline in the USD index to a yearly low has emboldened EURUSD bulls. Eurizon SLJ anticipates that the current wave of dollar selling will continue. The aggressive tightening of the Fed’s monetary policy and the associated increase in the attractiveness of US assets have masked the main vulnerability of the USD: the double deficit, budget, and trade balance. Furthermore, the military conflict in Eastern Europe has eroded confidence in the greenback as the world’s primary reserve currency. As the Fed cuts rates, the shortcomings of the US dollar will become more apparent.
Weekly EURUSD trading plan
The differing speed of monetary expansion by the Fed and ECB are reflected in EURUSD quotes. The US dollar will benefit regardless of the Fed’s actions. In the near term, its main challenge is the increased global appetite for risk. Consequently, disappointing NVIDIA statistics will affect not only the S&P 500 but also the major currency pair. The strategy suggests opening more short trades, adding them to the ones initiated at $1.118 once the pair breaks through the support level of $1.115.
Price chart of EURUSD in real time mode
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