Greenback is growing thanks to its safe-haven status and expectations of the Fed’s monetary policy normalization, which translates into a rally in Treasury yields. How long will the EURUSD be falling? Let us discuss the Forex outlook and make up a trading plan.
Monthly US dollar fundamental forecast
That is the nature of safe-haven assets: they are highly demanded in times of global economic crisis. However, once there is some positive news, safe havens are being sold off. TD Securities believes that a lot of negative has been already priced in the USD rate, and it would not buy the greenback at current levels. I beg to differ.
Having added more than 2% in September, the USD index reached its highest level in a year. Does its price include the factor of a potential US default? I do not think so. If Congress has solved a similar problem at the last moment nine dozen times before, why shouldn’t it do the same in October 2021? Yes, Republicans are resisting, having already blocked the Democratic proposal twice, but in the end, reason must win. Solving the debt ceiling problem will only temporarily strengthen the S&P 500 and weaken the US dollar. The trend cannot be broken.
Dynamics of USD index
Source: Wall Street Journal
Is Washington’s statement that it does not want an escalation of the conflict with Beijing and is ready to negotiate good news for the global economy and a reason to sell the greenback? I doubt. Import tariffs remained in force, and what kind of dialogue they are talking about is not specified. They could mean the phase-two negotiations on structural reforms in China, for which it is not ready. In addition, the USA intends to demand that China must fulfill its obligations to increase purchases of US products by $200 billion compared to 2017, which, according to the Peterson Institute for International Economics, were implemented only by 62% in the three months before the end of 2021.
Will the victory over the pandemic in Europe and the USA result in the rapid growth of the global economy, pressing down safe-haven assets? I don’t think so, as the oil prices rally to seven-year highs and the greenback strengthening are the factors hindering the global GDP expansion. It means further inflation rise and tightening of the global financial conditions, which will eventually lead to stagflation.
Will the US stock market stop correcting, depriving the US dollar of the benefit of a safe-haven asset? I expect more volatility and long-term consolidation. About 40% of the revenue of the S&P 500 companies comes from abroad, so a rise in the USD index will worsen corporate reporting and press down the stock index, further strengthening the greenback.
Treasury yields have recently been growing faster than the European bond yields. Which is better, to buy 10-year US Treasury bonds at a rate of 1.5% or German bonds with a similar maturity at a rate of -0.3%? The answer is obvious.
Dynamics of Treasuries best daily rallies
Source: Wall Street Journal
Monthly EURUSD trading plan
I am not sure that bad news has ended. I am not sure if the Treasuries yield will stop rising. Therefore, the EURUSD downtrend will continue. It is relevant to sell on the price rise with the targets at 1.145 and 1.133.
Price chart of EURUSD in real time mode
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