All traders know that Forex trading is like a swing. Currencies move up and down, and the higher an asset rises, the more likely it is to fall. In 2022, the currency pairs have been moving by a record of 15%-20%. What will be the result? Let us discuss the Forex outlook and make up a EURUSD trading plan.

Monthly US dollar fundamental forecast

The Fed’s trade-weighted dollar rate hit a new record high. Over the past year, the greenback has strengthened by 22%. History shows that after more than 20% rallies in 2009 and 2015, the USD index sank 7.7% and 6.7% within two months. If the peak is near, could it be followed by a drop?

Dynamics of USD index

Source: Reuters

As of September 20, speculative net longs on the US dollar against major world currencies reached $10.23 billion. This is almost half of the July high of almost $20 billion. However, we are talking about the third longest series of bullish positions since 1999. Hedge funds have held them for 62 weeks.

If we remove the pandemic shock period, net longs on the USD in the options market have reached a new all-time high, according to Morgan Stanley. 56% of investors polled by Bank of America consider buying the US dollar the most crowded deal.

Asset manager Bailard believes that in the near future, one can easily see a drop of the US dollar against the euro or the yen by 10%-15%.

I don’t think such a scenario is real. Although many bearish factors have been priced in the EURUSD, suggesting a possibility of a correction, the downtrend is still rather strong. Yes, the ECB decided to keep up with the Fed and raise rates by 75 basis points. However, the Fed simultaneously sells $95 billion of balance sheet assets per month, while the ECB doesn’t. According to Christine Lagarde, QT will start when borrowing costs reach a neutral level.

Dynamics of ECB asset purchases under QE

Source: Bloomberg

The economic growth gap also presses down the EURUSD. According to the OECD, the war in Ukraine will cost the global economy $2.8 trillion in lost output by the end of next year. Due to its territorial proximity, it will affect the euro area to a greater extent than the United States. The currency bloc’s GDP will grow by a modest 0.3% in 2023, while its German counterpart will sag by 0.7%. If the armed conflict drags on and gas prices in Europe jump another 50%, the euro area will face a 1.3% recession. The forecast assumes the growth of the US economy by 0.5% next year.

Along with divergences in monetary policy and economic growth, the decrease in global risk appetite encourages the EURUSD bears. The Dow has moved into bearish territory, and Morgan Stanley warns that a rally in the US dollar could trigger a global financial crisis as US companies’ foreign earnings shrink, dragging down stock indices.

Monthly EURUSD trading plan

Of course, exiting EURUSD shorts could result in a correction, including the return to parity. Nonetheless, the downtrend is strong, supported by fundamental factors. The price could go down to 0.95 and 0.92. I recommend selling on the price rise.

  

 

 

Price chart of EURUSD in real time mode