The EURUSD pair is gradually recovering its correlation with US stock indices. The S&P 500’s rally amid the de-escalation of the US-China trade conflict is lending a helping hand to the euro. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The upcoming trade deal between the US and China is helping the EURUSD.
- The Fed will cut rates in October, December, and March.
- The ECB may support euro bulls.
- Long trades opened on the EURUSD pair at 1.16 can be increased.
Weekly US Dollar Fundamental Forecast
The markets are buoyed by a wave of enthusiasm. US stock indices are setting new all-time highs, and the euro is rising as the currency of optimists, thanks to the de-escalation of the trade conflict between the US and China. Donald Trump stated that following the meeting with Xi Jinping, the nations should conclude a trade agreement. Investors are looking back and realizing that, against this backdrop, the EURUSD pair is expected to rise.
Indeed, in May, the S&P 500 jumped 3.3% after productive US-China talks in Geneva. The broad stock index rose 0.5% in September after Scott Bessent’s statements on the TikTok deal following the Madrid meeting. This also includes the 1.7% surge in the stock market in April following reports that Washington may reduce tariffs against Beijing and the October rise following Donald Trump’s statement that import duties are unsustainable. As a result, global risk appetite improved, supporting the EURUSD pair.
US Job Market Statistics
Source: Bloomberg.
Bulls are tempered by the Federal Reserve’s internal divisions, which may lead to a shift in hawkish rhetoric following the Federal Open Market Committee (FOMC) meeting scheduled for October 28–29. However, the inflation rate in September grew at a slower pace than expected, which has led to a moderation in these concerns. The central bank is concerned about the cooling labor market and is committed to maintaining its cycle of monetary policy easing. The derivatives market is highly confident that the federal funds rate will be cut in October, December, and March.
In contrast, the ECB has most likely concluded its cycle of monetary expansion. The previous decline in the deposit rate took place in June. Since the summer, Christine Lagarde has been asserting that the central bank is in a strong position. If, following the Governing Council meeting, she announces that borrowing costs could either rise or fall, this will be interpreted as a hawkish signal and will open the way for the EURUSD to move in an upward direction.
The euro’s value is bolstered by encouraging macroeconomic data. Following a positive uptick in eurozone PMIs, German business sentiment also demonstrated a favorable outlook. It appears that the currency bloc is showing resilience in the face of Donald Trump’s tariffs and is anticipating a prosperous future. This positive shift can be attributed, in part, to Germany’s fiscal stimulus and the augmented defense spending within the European Union.
France-Germany 10-Year Bond Yield Spread
Source: Bloomberg.
The latest developments in the ongoing political drama in France are exerting pressure on the EURUSD exchange rate. The Socialists are demanding higher taxes on the rich in light of the postponement of pension reform. Otherwise, they are threatening to hold a vote of no confidence in the government. At the same time, the widening yield spread between French and German bonds is hindering the euro’s growth.
Weekly EURUSD Trading Plan
In such conditions, with the EURUSD rate hovering around 1.16 against the backdrop of US inflation data, long positions on EURUSD can be maintained and increased if the Fed meeting concludes as expected.
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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