Dollar wins. Forecast as of 23.09.2022

Reverse currency wars are now in fashion. Central banks are willing to strengthen their local currencies through rate hikes and forex interventions. Where will the EURUSD go? Let us discuss the forex outlook and make up a EURUSD trading plan.

Monthly US dollar fundamental forecast

The wave of interest rate hikes has swept across the world, from Norway to South Africa. Central banks are trying to reduce inflationary pressure and, at the same time, support their own currencies. Through foreign exchange intervention, as Japan does, or by increasing borrowing costs. However, nothing seems to weaken the US dollar. Conversely, the EURUSD bears are going ahead.

Switzerland’s exit from the policy of negative rates, the 50-basis-point rate hike by the Bank of England, and the Riksbank’s bank rate hike by 100 basis points resulted in the yield surge all over the world. The Treasury yields are also growing, strengthening the US dollar. So, reverse currency wars will hardly press down the dollar.

Dynamics of world’s major currencies

Source: Bloomberg

The Fed’s monetary tightening encourages other central banks to hike interest rates, and bond yields are rising all over the world, strengthening the US dollar.

Treasury rate hikes support the US dollar in two ways. First, US assets become more attractive, which ensures the capital flow to the USA. Secondly, the fundamental valuation of stocks is declining, investors are getting rid of shares, stock indices and risk appetite are falling, and safe-haven currencies are strengthening. At the same time, some analysts suggest that recession risks have not yet been fully priced in the value of equity securities. The fall of the S&P 500 is due only to the Fed’s rate hike. The risks of shrinking corporate profits are not yet in the price. Stock indices have room to fall, as well as the EURUSD.

The 17% rally in the USD index hurts the entire global economy. Many countries have dollar debts, the servicing costs of which are constantly rising. In an attempt to stop inflation exported from the US, their central banks are raising rates, pushing economies into recession. The global recession will also affect the USA, but this circumstance does not stop the Fed. The central bank’s goal for PCE is to return to the 2% target, and until this goal is reached, the Fed will aggressively tighten its monetary policy.

The harm of a strong dollar to global GDP would seem to push countries towards coordinated foreign exchange intervention, as was the case of the Plaza Accord in 1985. The problems are that the pandemic and the war in Ukraine have turned into deglobalization, and the Fed simply does not need to interfere in forex. The Fed is satisfied with a strong greenback position. Single purchases of national currencies, as in the case of the yen, can only have a temporary effect.

Monthly EURUSD trading plan

The EURUSD downtrend is strong. If the price breaks through the September low of 0.981, it will likely reach the targets at 0.97 and 0.95. If so, one could add up to the shorts.

   

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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