The US dollar is facing significant challenges as a safe-haven currency against the recent surge in US stocks. This shift reflects a transition in market sentiment from fear to greed. Let’s discuss this topic and develop a trading plan for the EURUSD pair.
The article covers the following subjects:
Highlights and key points
- Recession odds in the US economy have fallen sharply.
- The markets are once again driven by greed.
- The Fed is expected to signal a rate cut.
- The EURUSD pair may rise to 1.1065 and 1.111.
Weekly US dollar fundamental forecast
In a remarkably short time frame, investor sentiment shifted from risk aversion to risk-taking. The most impressive weekly performance of US stock indices in 2024 sparked a surge in bullish sentiment on the EURUSD pair. The major currency pair has returned to the area of 7-month highs and is poised to resume its upward trajectory, buoyed by expectations of a dovish stance in the minutes of the recent Fed meeting and Jerome Powell’s remarks at Jackson Hole.
While the US jobs report for July shocked the markets, data on inflation, retail sales, and unemployment claims led to a surge in US stock purchases. A favorable environment for stock indices has emerged, where the economy is still growing, inflation is under control, and corporate profits and the AI sector remain strong.
US inflation and unemployment rate
Source: Bloomberg.
The slowdown in consumer price growth and the increase in unemployment to the highest levels since 2021 have prompted the Fed to consider cutting the federal funds rate. Investors are confident that this will occur in September, with reduced recession risks indicating a 25-basis-point start to the monetary expansion. Goldman Sachs has reduced the probability of a downturn in the US economy next year from 25% to 20%, citing robust retail sales and jobless claims statistics. Should the August jobs report be favorable, the probability will revert to its previous month’s level of 15%.
Therefore, the concern has been alleviated. The markets are once again driven by greed linked to expectations of the Fed’s monetary expansion cycle, the stability of the US economy, the Goldilocks scenario, AI technology, and corporate profits. However, investors tend to overlook the impact of the yen and the Bank of Japan on the fluctuating global stock indices. By the end of the five-day period on August 10, Japanese investors had purchased the largest amount of foreign bonds in 12 weeks. The carry trade was revived as the USDJPY pair approached the level of 150 due to the announcement that the central bank would not raise rates amid heightened turbulence.
However, the market has returned to calm, and hedge funds have become net buyers of the yen for the first time since 2021.
Speculative positions on Japanese yen
Source: Bloomberg.
Japanese and US stocks may begin to decline again, which would remove a key advantage for the EURUSD pair. Additionally, market expectations of the Fed’s monetary expansion of 93 bps in 2024 still appear to be overly optimistic.
Weekly EURUSD trading plan
Despite the expectation that the dovish rhetoric expressed in the July FOMC meeting minutes and by Jerome Powell at Jackson Hole will push the EURUSD pair towards 1.1065 and 1.111, the potential for the pair’s rally appears limited. Traders who initiated long trades at 1.1015 should monitor the quotes, looking for potential reversal points.
Price chart of EURUSD in real time mode
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