The decline in US Treasury bond yields and stock indices is prompting a renewed focus on the recession narrative, which is supporting the EURUSD pair. The greenback is facing pressure from investors calling for the Fed to slash interest rates. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Highlights and key points
- Talks about recession in the US economy are not subsiding.
- The US dollar is falling as investors demand the Fed to cut rates.
- Unemployment claims could trigger new market turbulence.
- The EURUSD pair may return to the upper boundary of the 1.08-1.1 trading range.
Weekly US dollar fundamental forecast
If you are concerned about the possibility of a recession, it is likely that you are already experiencing its effects. The possibility of an S&P 500 correction-induced recession remains a concern. The stock index is falling, which in any other environment should have led to strengthening the US dollar as a safe-haven currency amid worsening global risk appetite. The decline in stock prices is casting shadows over the US economy. Against this backdrop, investors call on the Fed to make significant cuts to the federal funds rate, boosting EURUSD quotes.
At the height of the Black Monday crisis, the derivatives market anticipated three rounds of monetary expansion from the Fed in 2024, with each round expected to be 50 bps. The estimated scale of monetary easing was initially set at 150 bps, but this was subsequently revised down to 108 bps. Market expectations are for a reduction in borrowing costs by 41 bp in September. However, a half point from the central bank could add to the panic. Will Jerome Powell and his colleagues take this step? Many believe that the likelihood of this is low.
Expectations on Fed rate cuts
Source: Bloomberg.
Despite reassurances from Fed and BoJ officials, investor concerns persist. In light of this, JPMorgan has increased the odds of a recession by the end of 2024 to 35% from 25%. The company’s latest estimates suggest that the probability of a recession before the second half of the year is 45%. While employment declines during hard landings, which is not currently the case, there is no guarantee that this will remain the case. In the run-up to recessions, unemployment tends to rise slowly and then accelerate rapidly.
US unemployment during recessions
Source: Bloomberg.
The July increase in the indicator to a nearly three-year peak of 4.3% may be short-lived. Bloomberg research findings indicate that the 0.2 pp increase in unemployment in July was attributable to a 0.15 pp contribution from temporary layoffs resulting from Hurricane Beryl, which had rampaged in Texas. As anticipated, the markets are awaiting the release of the unemployment claims statistics. A significant decrease in the indicator would suggest short-term challenges in the labor market, creating an opportunity to invest in stocks and sell the EURUSD pair.
Currently, the major currency pair is rising due to declining US Treasury yields following an unsuccessful auction of $42 billion in 10-year securities and a decline in the S&P 500. Notably, the stock index decline is viewed as a potential indicator of an impending recession, prompting investors to demand that the Fed take a more aggressive approach to cutting the federal funds rate.
Weekly EURUSD trading plan
The ongoing market turbulence could see EURUSD quotes returning to the upper boundary of the anticipated consolidation range of 1.08-1.1. This is particularly the case if the number of unemployment claims exceeds expectations. Nevertheless, the current situation will eventually stabilize, leading to a decline in the euro’s value against the US dollar.
Price chart of EURUSD in real time mode
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