Bear markets tend to end up with a boom in assets in the early days. Something similar is currently happening with US stocks and EURUSD. Will the trends turn up? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly euro fundamental forecast
Investors have already fallen into the same trap twice. In August and September, they expected a dovish shift from the Fed. Now, they expect a dovish shift in October. Weak reports on the US manufacturing PMI and employment coupled with an unexpected decision by the Reserve Bank of Australia to slow down monetary tightening, support the rally in stock indexes, bringing the EURUSD back to parity.
When the S&P 500 marks the best two-day 5.7% rally since March 2020, investors have a sensible question. What was it? Optimists point out that bear markets tend to end with stocks skyrocketing in the first few days. Pessimists claim that downtrends have an uneven path and that this is a typical technical correction after a significant sell-off in September.
Dynamics of US stock indexes
Source: Bloomberg.
In fact, when Fear gives way to Greed in the market, traders are looking for the slightest sign that the Fed will finally stop hiking the rates. One of them was the rate hike by the Reserve Bank of Australia not by the expected 50 basis points, but by only 25 basis points. If the regulators act together, isn’t that a signal that other central banks will start to slow down as well?
A strong argument in favor of the fact that the Fed will do this is the deterioration of US domestic data. I believe it is natural. Monetary tightening has a delayed effect. Not immediately after the growth of borrowing costs, the economy begins to slow down; it takes some time. In this regard, the drop in the US manufacturing PMI reported by the ISM to a two-year low and a fall in the job openings by 1.1 million in August, the greatest since the pandemic started, suggest that the US economy is cooling down.
Dynamics of US job openings
Source: Financial Times.
As a result, the peak values of the federal funds rate expected by the derivatives market are falling. After the FOMC September meeting, derivatives bet on a rate hike to 4.7%, now, the ceiling is 4.5%. Under such conditions, the Treasury yields drop looks natural, supporting the S&P 500 rally.
However, no one can predict the Fed’s further actions without the reports on US employment and inflation, which are to be released on October 7 and 13. According to Capital Economics, the persistence of high prices will force central banks led by the Fed to speed up rather than slow down, the pace of monetary tightening. It should also be noted that the reversal of uptrends in the US dollar in the past occurred when the global economy began to outpace the US one. So far, the US economy has been outperforming.
Weekly EURUSD trading plan
Following the rally, the EURUSD should consolidate ahead of the US jobs report. It makes sense to take a part of the profits from the longs entered at 0.985.
Price chart of EURUSD in real time mode
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