The higher rises the US dollar, the more investors remember Plaza Accord. Then, coordinated Forex interventions turned out to be efficient. Will this situation repeat this time? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
Investors are living through a hard time now. There is nothing safe to buy. Both stocks and bonds are sold off. The S&P 500 has lost a quarter of its value since the beginning of the year, with 10-year Treasury yields at the moment reaching their highest level in a dozen years. The main beneficiary is the US dollar, the growth of which even more scares the financial markets because, through a strong currency, the USA exports to the rest of the world both high inflation and a recession.
Dynamics of financial assets
Source: Reuters.
When US stocks have performed, in January-September, their worst drop in 20 years, and FOMC members start talking about a 5% federal funds rate, we realize what’s driving the greenback’s 17.5% year-to-date gain. The bullish drivers for the greenback are demand for safe-haven assets and aggressive tightening of the Fed’s monetary policy.
Optimists in the stock market can only rely on history. It shows that since 1942, the S&P 500 has always risen by an average of 15% in the 12 months after the midterms. However, history is a good guide, but it is never true knowledge, especially if the past is contradictory. Thus, since 1950, the bear markets of the broad stock index have averaged 391 days, and it has sagged by 35.6%. Now we are talking about 269 days and 25%. Equities, like global risk appetite, have room to fall. This means the EURUSD downtrend is far from being exhausted.
What can stop the US dollar? According to 45% of the 795 MLIV Pulse respondents, a coordinated foreign exchange intervention could weaken the greenback. The more the greenback grows, the closer the global recession, and the more often investors remember 1985. The Plaza Accord agreement, after which the USD index fell by 10% within two months, and by almost 50% two years later. I am skeptical about this idea. In 1985, the Fed, led by the legendary Paul Volcker, began to gradually cut rates after a cycle of monetary policy tightening, and US participation in the agreement guaranteed the effectiveness of foreign exchange intervention.
The situation is different nowadays. The Fed has made it clear that it is ready to sacrifice the economy for the sake of pressing down inflation, and the USA will not sell dollars. A strong dollar helps the central bank fight sky-high prices. In addition, when rates rise and the demand for safe-haven assets increases, it makes no sense to expect a weak dollar.
What can stop USD growth?
Source: Bloomberg.
Weekly EURUSD trading plan
I suppose the market needs a pause. It can’t be falling or rising indefinitely. There are no strong reasons for the EURUSD upward corrections, but the euro bears could exit shorts to take the profit as the pair is rising. This is the manifestation of greed. My strategy is to buy the euro on the breakout of the resistance at $0.985 and, next, to sell on the rebound from levels $0.9885, $0.995 and $1.
Price chart of EURUSD in real time mode
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