Everyone knows that it is no use going against the Fed. However, financial markets fall into the same trap again and again. The S&P 500 rally supported the EURUSD, but as soon as the bubble burst, the pair fell below parity. Let us discuss the forex outlook and make up a trading plan.
Weekly euro fundamental forecast
The EURUSD was down as the Nord Stream was shut down for maintenance and the US stock market featured the worst daily drop over the past couple of months. The major currency pair has slipped below parity and is trading at its lowest levels since 2002 when the euro took its first steps. At the same time, large banks claim that the euro will be falling even deeper. The energy crisis in Europe and the return of interest in safe-haven assets discourage the EURUSD bulls.
The market was wrong, expecting the Fed to sound dovish and lowering the potential federal funds rate. The S&P 500 capitalization rose $7 trillion from its July low to its August high, but the bubble burst in the end.
Don’t go against the Fed. That is the rule. My recommendation to sell the EURUSD at 1.0355 and1.03 has yielded a profit. Traders, who understand the market, were selling the euro on the growth or, like hedge funds, built up record shorts across futures for a key overnight rate that moves in line with the Fed’s benchmark. They will win if Jerome Powell sounds hawkish in Jackson Hole, which is highly likely. The US central bank needs to tighten financial conditions, and it will do that, setting back the stock indexes.
Dynamics of speculative positions on futures bets
The current collapse of the euro during six out of the last seven trading days in forex is nothing more than an attempt to join the downtrend. I won’t be surprised if, after the Fed chairman’s speech on August 26, EURUSD will rise. No matter how hawkish the rhetoric of Jerome Powell may seem to investors, they buy news and sell facts. The implementation of this principle concerning the US dollar is the usual taking profits from the EURUSD shorts. It may sink even deeper ahead of Jackson Hole or consolidate at current levels, but a rebound is sure to happen.
Nonetheless, the euro’s medium-term prospects are bearish, according to large banks. Commerzbank expects a soon drop to $0.98 as the ECB has taken the second dovish position among major regulators after the Bank of Japan, and in this regard, the regional currency is extremely sensitive to the Fed’s hawkish rhetoric. Nomura and Morgan Stanley believe that EURUSD will go even lower to 0.975 and 0.97, respectively, with the prospect of falling to 0.95 if it doesn’t consolidate above the indicated levels.
ING names another reason for the euro drop; it is portfolio rebalancing by Asian central banks. Due to foreign exchange interventions to maintain the exchange rates of their own monetary units, the gold and foreign exchange reserves of India, Thailand, and South Korea decreased by $115 billion. Mostly dollars were sold, and to regain the previous share of the USD, it is required to sell local currencies.
Weekly EURUSD trading plan
Price chart of EURUSD in real time mode
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