The euro had been falling amid France’s budget crisis. However, investors’ belief that the Fed will keep interest rates unchanged, along with disappointment over artificial intelligence, helped EUR/USD find its footing. Let’s discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- Falling Treasury yields weigh on the US dollar.
- Disappointment over AI pushes bond yields lower.
- The Fed and ECB will remain cautious about interest rates.
- Selling EUR/USD if the price fails to break above 1.128 or 1.134 remains a valid strategy.
Weekly Fundamental Forecast for Dollar
Disappointment or crisis? The US dollar ended its four-week winning streak as strong US inflation data failed to convince investors that the Fed would raise interest rates in October. Kevin Warsh also disappointed EUR/USD bears by not commenting on a possible Fed rate hike. Meanwhile, France’s fiscal problems would have been a strong reason to sell the euro even without the approaching presidential election. Nationwide protests have added to the pressure.
Euro Speculative Positions
Source: Bloomberg.
France’s budget crisis prompted speculators to increase their net short positions in the euro to their highest level since July. A further increase could push them to levels last seen in March 2020. Investors are selling European assets, including bonds. This differs sharply from the US, where Treasury yields had been rising until early October because investors were confident in the strength of the US economy.
Despite accelerating inflation, expectations of a Fed rate hike in October did not increase. This lack of change in expectations, combined with disappointment over AI, pushed Treasury yields lower and weakened the US dollar. The euro had a chance to recover despite widespread protests in France, and it took that chance. EUR/USD found its footing, with its next moves now largely dependent on the stock market.
EURUSD and Yield Differentials
Source: Bloomberg.
Central banks are becoming passive observers. Christine Lagarde echoed Kevin Warsh’s view that the bond market would do the work for central banks. She noted that higher borrowing costs tighten financial conditions and slow economic growth. This, in turn, should ease inflation. In other words, the ECB has good reason to stay on the sidelines and watch how events unfold.
Following the US inflation data and Kevin Warsh’s speech, markets became convinced that the Fed would also stay on the sidelines. However, every currency pair has two sides. The ECB’s passive stance will prevent EUR/USD from rising too far, especially amid France’s budget crisis. ING expects the euro to consolidate between $1.10 and $1.15, with a risk of falling to $1.07 if the situation in Paris worsens.
At the same time, net short positions in the greenback are large. Disappointment over AI and the resulting sell-off in US stocks could push Treasury yields even lower and further weaken the US dollar. Under these conditions, investors should pay as much attention to the corporate earnings season as they do to economic data.
Weekly Trading Plan for EUR/USD
The strategy of selling EUR/USD if the price fails to break above 1.128 or 1.134, or falls below 1.12, remains relevant. I do not expect major technology companies to disappoint investors significantly or the AI bubble to burst in 2026.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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