Dollar goes ahead. Forecast as of 07.09.2022

The US economic strength supports the dollar. The inflation in other countries grows, and central banks have to hike interest rates, pressing down the GDP. As a result, the greenback continues strengthening. Let us discuss the forex outlook and make up a EURUSD trading plan.

Monthly US dollar fundamental forecast

Even in a recession, the US economy will look better than Europe with its energy crisis or China with its COVID-19. The US labour market is strong, and consumer expenditures are steadily growing, so the recession in the USA will hardly be long-term or deep, if it happens at all. This circumstance contributes to the capital inflows into the US stock and mutual funds for 4 of the last 6 weeks. International funds encounter the capital outflow for 20 weeks in a row, the longest losing streak since October 2019. US exclusivity works! And this is not the only factor pushing EURUSD down.

Not only the massive monetary and fiscal stimulus due to the pandemic, but also a strong dollar supports the US economy. The strong USD fuels inflation in other countries, forcing central banks to aggressively raise rates, and slowing down local GDPs. At worst, it could lead to a recession. Most goods in the world are traded in the US dollar. So, rising commodity prices increase the cost of imports and deteriorate the terms of trade. Because of this, according to Capital Economics, Germany is about to lose 3.3% of its gross domestic product, and Italy – 5.3%. It’s worse than during the oil crisis of the 1970s.

Terms of trade influence on GDP

    

Source: Bloomberg.

The main experience of those years shows that the market’s glut against the background of the highest prices eventually resulted in their collapse. The same will happen with gas, but no one knows when exactly. In the meantime, the EU is preparing for the most severe winter in decades, and much should depend on the weather. According to Wood Mackenzie, cold December-February will lead to a reduction in gas stocks in Europe from the current more than 80% to 4% by March. The problems will continue into 2023 when the EU can only fill its storage facilities by 63%.

The good news is that the AccuWeather forecasting service expects temperatures in western Europe to be 1-2 degrees above normal in winter. The bad news is that even in warm winters, there are freezing periods. According to Goldman Sachs, the markets have underestimated and will continue to underestimate the scale of the energy crisis, which suggests the EURUSD downtrend should continue.

Unlike the Bloomberg USD index, which hit an all-time high, the real effective greenback rate is 11% below its peak in 1985.

Dynamics of USD indexes

Source: Bloomberg.

Monthly EURUSD trading plan

Back then, Paul Volcker and his Fed were running an aggressive campaign to curb inflation, and judging by Jerome Powell’s Jackson Hole speech, the current Fed is ready to follow in the footsteps of its predecessors. This circumstance, coupled with US exclusivity, suggests that the EURUSD downtrend is far from being exhausted. There could be a shallow correction that should be used to enter sell trades with a target around 0.95.

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.

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