USD is back. Forecast as of 26.10.2023
If the conflict in the Middle East forced EURUSD to step into uncharted territory, then its de-escalation brought everything back to normal. Thanks to the favorable external background, the USD began to strengthen. Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
As soon as the geopolitical factor receded, old patterns returned to the market. The yield on 10-year Treasuries is growing and is approaching 5%, the Nasdaq 100 index has begun a correction, and EURUSD quotes have been falling for the third day. Investors have entered familiar territory and are eagerly awaiting the release of US GDP data for the third quarter and the ECB meeting.
In fact, the currency is strengthening not because it has growth drivers. It does this when actual results exceed expectations. In April, Wall Street Journal experts predicted that American GDP would contract in the third quarter. In June they forecasted a slight expansion. The estimate is now 4.7%. That’s higher than 4.5% for professionals surveyed by Bloomberg and 4.3% for Reuters.
US GDP dynamics
In any case, we are talking about more than double the 2.1% figure for the second quarter. Thank American consumers for this. They have accelerated their spending amid a strong labor market, slowing inflation and drawing on savings accumulated during the pandemic.
This is good news for Joe Biden, but not very good news for the Fed. The central bank would like to see the economy cool, but for now it is watching consumer prices slow down due to external factors, including the restoration of supply chains. Is the fight against high inflation not over?
Dynamics of consumer spending and income in the USA
Christine Lagarde said this ahead of the ECB meeting. She’s confident the central bank is on the right track, but it needs to closely monitor wages, unit profits and other indicators to see exactly where the risks lie.
The ECB chief’s attempt to leave the door open for a resumption of the monetary tightening cycle by declaring that the fight against inflation is not over is laudable, but the markets do not believe it. According to Bloomberg insider, Christine Lagarde spoke a lot about progress in this direction at closed events, and experts expect a slowdown in consumer prices in the eurozone to 3% in the coming months. Ultimately, high inflation cannot continue for long in a weak economy.
The eurozone economy is weak. The latest data on consumer confidence and business activity hint at a recession in the second half of the year. The contrast with US GDP is obvious. This is where the factor of American exceptionalism arises and the claim that the state of the US economy is the best among all.
Weekly EURUSD trading plan
Even though Bloomberg experts predict that US GDP will slow to 0.7% in the fourth quarter, they have been wrong before. Divergence in economic growth could push EURUSD towards parity. So keep a close eye on the support test at 1.05. A breakout will allow to add up to short trades entered in 1.068-1.07. A rebound will be the basis for exiting and switching to long trades.