The US dollar has used the current market volatility to its advantage. Market panic has eased, and the EURUSD pair is at risk of falling below 1.09 due to an absence of recession in the US and investors overestimating the extent of the Fed’s monetary expansion. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Highlights and key points
- There is no recession in the US, and market panic has subsided.
- Divergence in GDP growth remains despite the slowdown in the US economy.
- The market is overestimating the extent of the Fed’s monetary expansion.
- The EURUSD pair risks continuing to fall towards 1.088 and 1.0865.
Weekly US dollar fundamental forecast
On a positive note, the market correction is nearing its end. The current economic situation does not point to a recession. The fluctuations in various assets, including the EURUSD pair, result from a reversal in speculative trades rather than the emergence of bubbles or indications of an impending economic collapse. The negative aspect of this situation is that if a recession does occur, it will be due to the conclusion of the post-pandemic consumption boom, which is exemplified by the stock market. A correction in the S&P 500 could trigger a recession. The events of early August could be viewed as a dress rehearsal.
Investors joke that stock markets have predicted nine of the past five recessions in the US economy. The S&P 500 has experienced a 7.5% decline over the past 14 days, reaching a new record low. According to analysis from the Bespoke Investment Group, such rapid sell-offs are uncommon. Historically, these periods of decline have been followed by a recovery in the following weeks or months. The collapse in 2020, caused by the pandemic’s impact, was an exception to the norm. However, the market demonstrated resilience even after that and continued to move higher.
The issue is that the events of August have significantly tightened financial conditions. Along with excessively high real central bank rates, this prevents inflation from returning, which is beneficial. At the same time, it places a significant and detrimental burden on the US and eurozone economies.
US and eurozone financial conditions
Source: Bloomberg.
The recent deceleration in US GDP growth is a negative development for EURUSD bears. The US economy has been expanding rapidly in recent years, outperforming its peers, which has provided the US with a competitive advantage in the global economy and supported the USD index. However, it is one thing when the divergence in economic growth is shrinking. It is another when other countries are also slowing down, making it impossible to talk about a sustained EURUSD rally.
Real GDP of G7 countries
Source: Bloomberg.
As anticipated, an August Bloomberg survey of experts indicates that the EURUSD exchange rate will decline to 1.08 over the next three months, followed by an increase to 1.11 by September 2025. HSBC observes that even if the US economy is losing momentum, it has negative implications for the global economy. In such an environment, the US dollar is performing well.
This is not the only advantage the greenback has. The cooling of economic growth in the US reduces the chances of the current Democratic presidential candidate, Hillary Clinton, winning the election in November. Donald Trump, with his pro-inflation and anti-globalization policies, risks regaining the lead in the race. His return to the White House is perceived as a bearish factor for the EURUSD pair.
Weekly EURUSD trading plan
Forecasts anticipating a federal funds rate reduction in 2024 are unduly optimistic. What should the Fed do in response to the market turbulence? The regulator could implement a significant loosening of monetary policy at an extraordinary FOMC meeting or maintain composure and continue to assess the data. The Fed will likely pursue the latter course of action. Consequently, the EURUSD pair is at risk of declining to 1.088 and 1.0865. Short trades can be opened as long as the pair is trading below 1.094.
Price chart of EURUSD in real time mode
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